N-CSRS 1 a_highyieldadv.htm PUTNAM HIGH YIELD ADVANTAGE FUND a_highyieldadv.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM N-CSR
 
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
 
Investment Company Act file number: (811-04616)  
 
Exact name of registrant as specified in charter: Putnam High Yield Advantage Fund
 
Address of principal executive offices: One Post Office Square, Boston, Massachusetts 02109
 
Name and address of agent for service: Beth S. Mazor, Vice President
  One Post Office Square
  Boston, Massachusetts 02109
 
Copy to: John W. Gerstmayr, Esq.
  Ropes & Gray LLP
  One International Place
  Boston, Massachusetts 02110
 
Registrant’s telephone number, including area code: (617) 292-1000
   
Date of fiscal year end: November 30, 2008    
 
Date of reporting period: December 1, 2007 — May 31, 2008

Item 1. Report to Stockholders:

The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940:


What makes Putnam different?


In 1830, Massachusetts Supreme Judicial Court Justice Samuel Putnam established The Prudent Man Rule, a legal foundation for responsible money management.

THE PRUDENT MAN RULE

All that can be required of a trustee to invest is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.


A time-honored tradition in money management

Since 1937, our values have been rooted in a profound sense of responsibility for the money entrusted to us.

A prudent approach to investing

We use a research-driven team approach to seek consistent, dependable, superior investment results over time, although there is no guarantee a fund will meet its objectives.

Funds for every investment goal

We offer a broad range of mutual funds and other financial products so investors and their financial representatives can build diversified portfolios.

A commitment to doing what’s right for investors

With a focus on investment performance, below-average expenses, and in-depth information about our funds, we put the interests of investors first and seek to set the standard for integrity and service.

Industry-leading service

We help investors, along with their financial representatives, make informed investment decisions with confidence.

Putnam
High Yield
Advantage Fund

5 | 31 | 08
Semiannual Report

Message from the Trustees 2
About the fund 4
Performance snapshot 6
Interview with your fund’s Portfolio Leader 7
Performance in depth 12
Expenses 15
Portfolio turnover 17
Risk 18
Your fund’s management 18
Terms and definitions 20
Trustee approval of management contract 22
Other information for shareholders 27
Financial statements 28

Cover photograph: © Richard H. Johnson

Message from the Trustees

Dear Fellow Shareholder:

The past several months have presented the economy with a serious set of challenges. The financial markets have reflected the uncertainty of the situation, making these difficult times for investors. Despite the circumstances, the U.S. economy has showed resilience. In late 2007 and early 2008, economic growth, while anemic, has nonetheless remained positive. The Federal Reserve Board has cut interest rates sharply and provided ample liquidity to financial markets, while the White House and Congress both stepped forward quickly with a fiscal package of tax rebates and investment incentives. A growing number of economists now believe that the U.S. economy may avert a recession after all.

Still, it is always unsettling to see the markets and one’s investment returns declining. Times like these are a reminder of why it is important to keep a long-term perspective, to ensure that your portfolio is well diversified, and to seek the counsel of your financial representative.

At Putnam, we continually strive to offer the best investment returns, innovative products, and award-winning service to our shareholders. In keeping with this tradition, we have some important and exciting news to share with you. We are pleased to announce that Robert L. Reynolds, a well-known leader and visionary in the mutual fund industry, has joined the Putnam leadership team as President and Chief Executive Officer of Putnam Investments, effective July 1, 2008. Charles E. Haldeman, former President and CEO, will take on the role of Chairman of Putnam Investment Management, LLC, the firm’s fund management company.

Mr. Reynolds brings to Putnam substantial industry experience and an outstanding record of success. He was Vice Chairman and Chief Operating Officer at Fidelity Investments from 2000 to 2007, and

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President of Fidelity’s Institutional Retirement Group from 1996 to 2000. We look forward to working with Bob as we continue to position Putnam to exceed our shareholders’ expectations.

Starting this month, we have changed the portfolio manager’s commentary in this report to a question-and-answer format. We feel this new approach makes the information more accessible and readable, and we hope you think so as well.

We would like to take this opportunity to welcome new shareholders to the fund and to thank all of our investors for your continued confidence in Putnam Investments.

Respectfully yours,


About the fund

Seeking a high level of current income for investors since 1986

Unlike most types of fixed-income investments, high-yield bond performance is more dependent on the performance of the companies that issue the bonds than on interest rates. For this reason, distinguishing between opportunities and potential pitfalls requires a rigorous investment process. With Putnam High Yield Advantage Fund, this process is highlighted by intensive research, investment diversification, and carefully timed portfolio adjustments.

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

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

As the bond markets shift over time, the fund’s management looks for ways to capitalize on developments that affect fixed-income securities in general and high-yield bonds in particular. For example, when credit spreads are wide and are expected to tighten, the fund may pursue the higher income potential offered by lower-quality issues. On the other hand, when credit spreads are narrow —that is, when the difference in yield between higher- and lower-rated bonds of comparable maturities is small — the fund may shift its emphasis to higher-quality high-yield bonds.

Lower-rated bonds may offer higher yields in return for more risk. Mutual funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses.

What makes a bond “high yield”?

High-yield bonds are fixed-income investments typically issued by companies that lack an established earnings track record or a solid credit history. In general, high-yield bonds offer higher interest rates than investment-grade bonds to compensate for their increased risk. Because of this added risk, these bonds are typically rated below investment grade by an independent rating agency (for example, the lowest Moody’s Investors Service rating of investment-grade bonds is Baa). The lower the rating, the greater the possibility that a bond’s issuer will be unable to make interest payments or repay the principal.

BOND RATINGS  
Moody’s Grade
Aaa Investment
Aa, A Investment
Baa Investment
Ba, B High yield
Caa/Ca High yield
C High yield

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


Performance snapshot


Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will fluctuate, and you may have a gain or a loss when you sell your shares. Performance of class A shares assumes reinvestment of distributions and does not account for taxes. Fund returns in the bar chart do not reflect a sales charge of 4.00%; had they, returns would have been lower. See pages 7 and 12–14 for additional performance information. For a portion of the periods, this fund may have

limited expenses, without which returns would have been lower. A 1% short-term trading fee may apply. To obtain the most recent month-end performance, visit www.putnam.com.

* The inception date of the fund’s benchmark, the JPMorgan Developed High Yield Index, was 12/31/94, which post-dates the 3/25/86 inception date of the fund’s class A shares.

† Returns for the six-month period are not annualized, but cumulative.

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Thanks, Paul, for taking the time today to talk about HighYield Advantage Fund’s recent performance. How did the fund perform?

The fund held up well during a volatile period and outperformed the overall high-yield bond market. For the six months ending May 31, 2008, the fund returned 1.63%, compared with 1.48% for its benchmark, the JPMorgan Developed High Yield Index, and 0.45% for its Lipper peer group, High Current Yield Funds.

What factors influenced the high-yield market during the period?

The high-yield market was volatile during the period due to concerns about the subprime mortgage market, the trajectory of the U.S. economy, and corporate business fundamentals. The default rate, which began the period at historically low levels, rose during the period, and investors expected it to continue climbing. At the beginning of the period, there was a large overhang of new issuance, but also a subdued demand from investors who had become extremely risk-averse. However,

Broad market index and fund performance

This comparison shows your fund’s performance in the context of broad market indexes for the six months ended 5/31/08. See page 6 and pages 12–14 for additional fund performance information. Index descriptions can be found on page 21.


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in April and May — in the aftermath of several moves by the Federal Reserve [the Fed], including the rescue of investment bank Bear Stearns — improving credit conditions helped the high-yield market rally, as did overall corporate earnings that met expectations.

Given this backdrop, what strategy did you pursue?

We were well positioned during this difficult period. We had taken down some of our lower-rated positions prior to the period and were overweight sectors that generally outperformed during this six-month time frame. Investing in floating-rate bank loans issued by high-yield companies was another method we used to temper the fund’s volatility. Unfortunately, this asset class also suffered from a large supply/demand imbalance during the first four months of the period — before rallying in April and May — and our overweight to the sector detracted from our performance relative to the benchmark.

What other moves did you make with the fund’s portfolio?

As high-yield bond prices remained volatile, we were able to uncover buying opportunities among some lower-quality pockets of the market. During the period, the fund benefited from strong security selection within the aerospace industry, as well as from overweights to the energy and metals/minerals industries. Underweighting the broadcasting, retail,

Top 10 holdings

This table shows the fund's top 10 holdings and the percentage of the fund's net assets that each represented as of 5/31/08. Holdings will vary over time.

  Coupon (%) and  
HOLDING (percentage of fund’s net assets) maturity date Sector/Industry
Ford Motor Credit Co., LLC (0.9%) 9 7/8%, 2011 Consumer cyclicals/Automotive
NRG Energy, Inc. (0.8%) 7 3/8%, 2016 Utilities & power/Power producers
General Motors Corp. (0.7%) 7 1/5%, 2011 Consumer cyclicals/Automotive
HCA, Inc. (0.7%) 9 1/4%, 2016 Health care/Health care
SunGard Data Systems, Inc. (0.7%) 9 1/8%, 2013 Technology/Computers
GMAC, LLC (0.7%) 4%, 2010 Financials/Financials
CCH II, LLC (0.7%) 10 1/4%, 2010 Consumer staples/Cable television
CCH I, LLC (0.6%) 11%, 2015 Consumer staples/Cable television
GMAC, LLC (0.6%) 8%, 2012 Financials/Financials
Intelsat Bermuda, Ltd. (Bermuda) (0.6%) 11 1/4%, 2016 Communication services/
    Telecommunications

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and services groups constrained results. Other sectors we overweighted included cable TV/wireless and consumer products. Chemicals, food/tobacco, and gaming/leisure were industries that we chose to underweight.

Let’s talk about some of the fund’s holdings. Which ones contributed to performance relative to the fund’s benchmark?

As mentioned, our stake in energy companies helped performance, including investments in natural gas companies El Paso, Williams, and Chesapeake Energy, all of which relatively profited from the rise in the price of natural gas. Energy companies are generally seen as being less sensitive to any economic downturn, which also helped these companies outperform. International Coal performed well, as the price of that commodity rose, and this holding was sold for a profit during the period. Our stake in defense and aerospace firm DRS Technology appreciated on the strength of its contracts with the U.S. Department of Defense, and the firm also benefited from a takeover bid received during the period. Relative to the index, the fund benefited further from underweighting three index components that performed poorly: automotive part manufacturer Delphi, which struggled because of ongoing concerns about the auto industry; casino company Harrah’s, which suffered from investor concerns

Credit quality overview

Credit qualities shown as a percentage of portfolio value as of 5/31/08. A bond rated Baa or higher (MIG3/VMIG3 or higher, for short-term debt) is considered investment grade. The chart reflects Moody’s ratings; percentages may include bonds not rated by Moody's but considered by Putnam Management to be of comparable quality. Ratings will vary over time.

 

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that an economic downturn would curtail consumers’ spending on gaming; and financing company Residential Capital, which was hurt by concerns about the company’s exposure to subprime mortgages.

Which securities detracted from performance?

Diversified media company Vertis underperformed when its proposed acquisition of a competitor, American Color Graphics, was called off. Restaurant company Buffets defaulted during the period in the aftermath of weak operating results. While the fund had a small stake in this company, we fortunately had cut back the position prior to the beginning of the fiscal period and prior to the default announcement, so the impact on the portfolio was less than it would have been. Underweighting mortgage company Countrywide Financial also negatively affected performance. Although this firm suffered badly from the subprime mortgage crisis, Countrywide’s bonds rose in price after Bank of America acquired it. Additionally, underweighting retailer Dollar General detracted as the company has outperformed many of its retail peers. Lastly, our stake in bank loans detracted from performance. Loans declined in price as demand for them dropped sharply at the same time a significant calendar of new bank-loan issuance was scheduled to come to market. We took advantage of these price declines to purchase additional bank loans at what we found to be compelling valuations.

I N  T H E  N E W S

For the first time since the 1930s, the U.S. Federal Reserve has extended financing to non-banks —specifically, primary dealers such as securities broker/dealers — as part of its ongoing attempt to foster the proper functioning of financial markets. The Primary Dealer Credit Facility (PDCF), established in March, allows the Federal Reserve Bank of New York to provide overnight cash reserves to primary dealers in exchange for a broad range of collateral. The new credit facility aims to help primary dealers in providing financing to participants in capital markets and to promote an overall orderly functioning of the financial markets. The PDCF will remain in operation as long as the Fed deems it necessary.

What’s your outlook for the coming months?

The backdrop for the high-yield market is still mixed. The fundamental outlook for the economy currently is, in our view, still negative, as we struggle with recession-like conditions, a weak financials sector, and commodity-price inflation led

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by surging oil prices. We believe that this environment likely will lead to deterioration in corporate business fundamentals. While the default rate remains low by historical measures, we believe it is expected to rise — something that has been at least partially factored into market prices. To that end, we find current market valuations to be fair. On the positive side, market factors of supply and demand have, in our view, improved significantly because we’ve worked through an unwieldy supply overhang that had weighed on the market. After years of relatively benign credit conditions, there is growing dispersion among quality tiers, sectors, and issuers. Given these conditions, understanding of downside valuations, free cash flow metrics, and available liquidity should continue to grow in relevance. We believe this kind of environment is one where our approach can prove significantly beneficial to our fellow shareholders.

Thanks for your time and insight today, Paul.

The views expressed in this report are exclusively those of Putnam Management. They are not meant as investment advice. Please note that the holdings discussed in this report may not have been held by the fund for the entire period. Portfolio composition is subject to review in accordance with the fund’s investment strategy and may vary in the future.

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Your fund’s performance

This section shows your fund’s performance, price, and distribution information for periods ended May 31, 2008, the end of the first half of its current fiscal year. In accordance with regulatory requirements for mutual funds, we also include performance as of the most recent calendar quarter-end and expense information taken from the fund's current prospectus. 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. Performance information does not reflect any deduction for taxes a shareholder may owe on fund distributions or on the redemption of fund shares. For the most recent month-end performance, please visit the Individual Investors section of www.putnam.com or call Putnam at 1-800-225-1581. Class Y shares are generally only available to corporate and institutional clients and clients in other approved programs. See the Terms and Definitions section in this report for definitions of the share classes offered by your fund.

Fund performance

Total return for periods ended 5/31/08

  Class A   Class B   Class C   Class M   Class R Class Y
(inception dates) (3/25/86)   (5/16/94)   (3/30/07)   (12/1/94)   (3/30/07) (12/31/98)
  NAV POP NAV CDSC NAV CDSC NAV POP NAV NAV
Annual average                    
(life of fund) 7.61% 7.41% 6.70% 6.70% 6.80% 6.80% 7.32% 7.16% 7.35% 7.78%
10 years 48.04 42.07 36.83 36.83 37.36 37.36 45.17 40.52 44.71 53.34
Annual average 4.00 3.57 3.19 3.19 3.23 3.23 3.80 3.46 3.76 4.37
5 years 52.51 46.47 46.93 44.93 46.99 46.99 50.59 45.65 50.98 54.64
Annual average 8.81 7.93 8.00 7.70 8.01 8.01 8.53 7.81 8.59 9.11
3 years 22.11 17.23 19.58 16.63 19.47 19.47 21.34 17.43 21.39 23.14
Annual average 6.89 5.44 6.14 5.26 6.11 6.11 6.66 5.50 6.67 7.18
1 year –0.65 –4.67 –1.28 –5.89 –1.31 –2.23 –0.71 –3.86 –0.69 –0.27
6 months 1.63 –2.40 1.42 –3.46 1.46 0.48 1.70 –1.56 1.71 1.86

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. After sales charge returns (public offering price, or POP) for class A and M shares reflect a maximum 4.00% and 3.25% load, respectively, as of 1/2/08. 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 for the first year and is eliminated thereafter. Class R and Y shares have no initial sales charge or CDSC. Performance for class B, C, M, R, and Y shares before their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and, except for class Y shares, the higher operating expenses for such shares.

For a portion of the periods, this fund limited expenses, without which returns would have been lower.

A 1% short-term trading fee may be applied to shares exchanged or sold within 90 days of purchase.

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Comparative index returns

For periods ended 5/31/08

  JPMorgan Lipper High
  Developed High Current Yield Funds
  Yield Index category average*
Annual average  
(life of fund) —† 6.90%
10 years 70.21% 47.62
Annual average 5.46 3.81
5 years 48.90 40.91
Annual average 8.29 6.99
3 years 20.00 16.52
Annual average 6.27 5.12
1 year –1.17 –2.61
6 months 1.48 0.45

Index and Lipper results should be compared to fund performance at net asset value.

* Over the 6-month, 1-year, 3-year, 5-year, 10-year, and life-of-fund periods ended 5/31/08, there were 477, 460, 386, 334, 166, and 28 funds, respectively, in this Lipper category.

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

Fund performance as of most recent calendar quarter

Total return for periods ended 6/30/08

  Class A   Class B   Class C   Class M   Class R Class Y
(inception dates) (3/25/86)   (5/16/94)   (3/30/07)   (12/1/94)   (3/30/07) (12/31/98)
  NAV POP NAV CDSC NAV CDSC NAV POP NAV NAV
Annual average                    
(life of fund) 7.48% 7.28% 6.56% 6.56% 6.67% 6.67% 7.19% 7.03% 7.22% 7.64%
10 years 44.92 39.16 33.89 33.89 34.41 34.41 42.13 37.54 41.64 49.96
Annual average 3.78 3.36 2.96 2.96 3.00 3.00 3.58 3.24 3.54 4.14
5 years 45.02 39.16 39.61 37.61 39.68 39.68 43.22 38.62 43.60 46.69
Annual average 7.72 6.83 6.90 6.59 6.91 6.91 7.45 6.75 7.51 7.96
3 years 17.86 13.19 15.36 12.51 15.19 15.19 17.12 13.37 17.18 18.75
Annual average 5.63 4.22 4.88 4.01 4.83 4.83 5.41 4.27 5.43 5.90
1 year –1.12 –5.07 –1.76 –6.35 –1.81 –2.72 –1.17 –4.38 –1.14 –0.89
6 months –0.65 –4.63 –0.89 –5.68 –0.85 –1.81 –0.58 –3.80 –0.72 –0.54

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Fund price and distribution information

For the six-month period ended 5/31/08

Distributions Class A Class B Class C Class M Class R Class Y
Number 6 6 6 6 6 6
Income $0.242 $0.219 $0.221 $0.236 $0.237 $0.248
Capital gains — — — — — —
Total $0.242 $0.219 $0.221 $0.236 $0.237 $0.248
Share value: NAV  POP NAV NAV NAV POP NAV NAV
11/30/07 $6.05  $6.30* $5.96 $5.95 $6.05 $6.25 $6.05 $6.19
5/31/08 5.90 6.15 5.82 5.81 5.91 6.11 5.91 6.05
Current yield            
(end of period)            
Current            
dividend rate1 7.12% 6.83% 6.39% 6.40% 6.90%  6.68% 6.90% 7.14%
Current 30-day            
SEC yield2,3            
(with expense            
limitation) N/A 7.69 7.27 7.27 N/A 7.51 7.77 8.27
Current 30-day            
SEC yield3            
(without            
expense            
limitation) N/A 7.69 7.26 7.27 N/A 7.51 7.77 8.27

The classification of distributions, if any, is an estimate. Final distribution information will appear on your year-end tax forms.

* Reflects an increase in sales charges that took effect on 1/2/08.

1 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP at end of period.

2 For a portion of the period, this fund may have limited expenses, without which yields would have been lower.

3 Based only on investment income and calculated using the maximum offering price for each share class, in accordance with SEC guidelines.

Fund’s annual operating expenses

For the fiscal year ended 11/30/07

  Class A Class B Class C Class M Class R Class Y
Total annual fund            
operating expenses 1.09% 1.84% 1.84% 1.34% 1.34% 0.84%

Expense information in this table is taken from the most recent prospectus, is subject to change, and may differ from that shown in the next section and in the financial highlights of this report. Expenses are shown as a percentage of average net assets.

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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. In the most recent six-month period, your fund limited these expenses; had it not done so, expenses would have been higher. 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 representative.

Review your fund’s expenses

The table below shows the expenses you would have paid on a $1,000 investment in Putnam High Yield Advantage Fund from December 1, 2007, to May 31, 2008. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses.

  Class A Class B Class C Class M Class R Class Y
Expenses paid per $1,000* $ 5.49 $ 9.27 $ 9.27 $ 6.76 $ 6.76 $ 4.24
Ending value (after expenses) $1,016.30 $1,014.20 $1,014.60 $1,017.00 $1,017.10 $1,018.60

* 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 average net assets for the six months ended 5/31/08. The expense ratio may differ for each share class (see the last table in this section). 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 May 31, 2008, use the calculation method below. To find the value of your investment on December 1, 2007, call Putnam at 1-800-225-1581.


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Compare expenses using the SEC’s method

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.

  Class A Class B Class C Class M Class R Class Y
Expenses paid per $1,000* $ 5.50 $ 9.27 $ 9.27 $ 6.76 $ 6.76 $ 4.24
Ending value (after expenses) $1,019.55 $1,015.80 $1,015.80 $1,018.30 $1,018.30 $1,020.80

* 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 average net assets for the six months ended 5/31/08. The expense ratio may differ for each share class (see the last table in this section). 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.

Compare expenses using industry averages

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 average net assets have been used to pay ongoing expenses during the period.

  Class A Class B Class C Class M Class R Class Y
Your fund's annualized            
expense ratio 1.09% 1.84% 1.84% 1.34% 1.34% 0.84%
Average annualized expense            
ratio for Lipper peer group* 1.12% 1.87% 1.87% 1.37% 1.37% 0.87%

* Putnam is committed to keeping fund expenses below the Lipper peer group average expense ratio and will limit fund expenses if they exceed the Lipper average. The Lipper average is a simple average of front-end load funds in the peer group that excludes 12b-1 fees as well as any expense offset and brokerage service arrangements that may reduce fund expenses.

To facilitate the comparison in this presentation, Putnam has adjusted the Lipper average to reflect the 12b-1 fees carried by each class of shares other than class Y shares, which do not incur 12b-1 fees. Investors should note that the other funds in the peer group may be significantly smaller or larger than the fund, and that an asset-weighted average would likely be lower than the simple average. Also, the fund and Lipper report expense data at different times and for different periods. The fund’s expense ratio shown here is annualized data for the most recent six-month period, while the quarterly updated Lipper average is based on the most recent fiscal year-end data available for the peer group funds as of 3/31/08.

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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 average portfolio value within a given period. Funds with high turnover may be more likely to generate capital gains 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

  2007 2006 2005 2004 2003
Putnam High Yield          
Advantage Fund 48% 46% 33% 53% 79%
Lipper High Current Yield Funds          
category average 83% 83% 73% 95% 98%

Turnover data for the fund is calculated based on the fund's fiscal-year period, which ends on November 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 comparability of the fund's portfolio turnover rate to the Lipper average. Comparative data for 2007 is based on information available as of 12/31/07.

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Your fund’s risk

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 Morningstar Risk.

Your fund’s Morningstar ® Risk


Your fund’s Morningstar Risk is shown alongside that of the average fund in its Morningstar category. The risk bar broadens the comparison by translating the fund’s Morningstar Risk into a percentile, which is based on the fund’s ranking among all funds rated by Morningstar as of June 30, 2008. A higher Morningstar Risk generally indicates that a fund’s monthly returns have varied more widely.

Morningstar determines a fund’s Morningstar Risk by assessing variations in the fund’s monthly returns — with an emphasis on downside variations — over a 3-year period, if available. Those measures are weighted and averaged to produce the fund’s Morningstar Risk. The information shown is provided for the fund’s class A shares only; information for other classes may vary. 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 Morningstar Risk does not mean that you cannot lose money on an investment in a fund. Copyright 2008 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.

Your fund’s management

Your fund is managed by the members of the Putnam Core Fixed-Income High-Yield Team. Paul Scanlon is the Portfolio Leader, and Norman Boucher and Robert Salvin 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 High-Yield Team, including those who are not Portfolio Leaders or Portfolio Members of your fund, please visit the Individual Investors section of www.putnam.com.

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Investment team fund ownership

The table below shows how much the fund’s current Portfolio Leader and Portfolio Members have invested in the fund and in all Putnam mutual funds (in dollar ranges). Information shown is as of May 31, 2008, and May 31, 2007.


Trustee and Putnam employee fund ownership

As of May 31, 2008, all of the Trustees of the Putnam funds owned fund shares. The table below shows the approximate value of investments in the fund and all Putnam funds as of that date by the Trustees and Putnam employees. These amounts include investments by the Trustees’ and employees’ immediate family members and investments through retirement and deferred compensation plans.

    Total assets in
  Assets in the fund all Putnam funds
Trustees $ 236,000 $ 86,000,000
Putnam employees $2,560,000 $631,000,000

Other Putnam funds managed by the Portfolio Leader and Portfolio Members

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

Norman Boucher is also a Portfolio Member of Putnam High Yield Trust and Putnam Floating Rate Income Fund.

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

Paul Scanlon, Norman Boucher, and Robert Salvin may also manage other accounts and variable trust funds advised by Putnam Management or an affiliate.

19

Terms and definitions

Important terms

Total return shows how the value of the fund’s shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund.

Net asset value (NAV) is the 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 4.00% maximum sales charge for class A shares and 3.25% for class M shares.

Contingent deferred sales charge (CDSC) is generally a charge applied at the time of the redemption of class B shares and assumes redemption at the end of the period. Your fund’s 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.

Current yield is the annual rate of return earned from dividends or interest of an investment. Current yield is expressed as a percentage of the price of a security, fund share, or principal investment.

Share classes

Class A shares are generally subject to an initial sales charge and no CDSC (except on certain redemptions of shares bought without an initial sales charge).

Class B shares are not subject to an initial sales charge. They may be subject to a CDSC.

Class C shares are not subject to an initial sales charge and are subject to a CDSC 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 CDSC (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.

Class Y shares are not subject to an initial sales charge or CDSC, and carry no 12b-1 fee. They are generally only available to corporate and institutional clients and clients in other approved programs.

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Comparative indexes

JPMorgan Developed High Yield Index is an unmanaged index of high-yield fixed-income securities issued in developed countries.

Lehman Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities.

Merrill Lynch 91-Day Treasury Bill Index is an unmanaged index that seeks to measure the performance of U.S. Treasury bills available in the marketplace.

S&P 500 Index is an unmanaged index of common stock performance.

Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index.

Lipper is a third-party industry-ranking entity that ranks mutual funds. Its rankings do not reflect sales charges. Lipper rankings are based on total return at net asset value relative to other funds that have similar current investment styles or objectives as determined by Lipper. Lipper may change a fund’s category assignment at its discretion. Lipper category averages reflect performance trends for funds within a category.

21

Trustee approval of
management contract

General conclusions

The Board of Trustees of the Putnam funds oversees the management of each fund and, as required by law, determines annually whether to approve the continuance of your fund’s management contract with Putnam Investment Management (“Putnam Management”) and the sub-management contract between Putnam Management’s affiliate, Putnam Investments Limited (“PIL”), and Putnam Management. In this regard, the Board of Trustees, with the assistance of its Contract Committee consisting solely of Trustees who are not “interested persons” (as such term is defined in the Investment Company Act of 1940, as amended) of the Putnam funds (the “Independent Trustees”), requests and evaluates all information it deems reasonably necessary under the circumstances. Over the course of several months ending in June 2007, the Contract Committee met several times to consider the information provided by Putnam Management and other information developed with the assistance of the Board’s independent counsel and independent staff. The Contract Committee reviewed and discussed key aspects of this information with all of the Independent Trustees. The Contract Committee recommended, and the Independent Trustees approved, the continuance of your fund’s management contract and sub-management contract, effective July 1, 2007. (Because PIL is an affiliate of Putnam Management and Putnam Management remains fully responsible for all services provided by PIL, the Trustees have not evaluated PIL as a separate entity, and all subsequent references to Putnam Management below should be deemed to include reference to PIL as necessary or appropriate in the context.)

In addition, in anticipation of the sale of Putnam Investments to Great-West Lifeco, at a series of meetings ending in March 2007, the Trustees reviewed and approved new management and distribution arrangements to take effect upon the change of control. Shareholders of all funds approved the management contracts in May 2007, and the change of control transaction was completed on August 3, 2007. Upon the change of control, the management contracts that were approved by the Trustees in June 2007 automatically terminated and were replaced by new contracts that had been approved by shareholders. In connection with their review for the June 2007 continuance of the Putnam funds’ management contracts, the Trustees did not identify any facts or circumstances that would alter the substance of the conclusions and recommendations they made in their review of the contracts to take effect upon the change of control.

The Independent Trustees’ approval was based on the following conclusions:

• That the fee schedule in effect for your fund represented reasonable compensation in light of the nature and quality of the services being provided to the fund, the fees paid by competitive funds and the costs incurred by Putnam Management in providing such services, and

• That this fee schedule represented an appropriate sharing between fund shareholders and Putnam Management of such economies of scale as may exist in the management of the fund at current asset levels.

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

22

the Trustees’ deliberations and how the Trustees considered these factors are described below, although individual Trustees may have evaluated the information presented differently, giving different weights to various factors. It is also important to recognize that the fee arrangements for your fund and the other Putnam funds are the result of many years of review and discussion between the Independent Trustees and Putnam Management, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements in prior years.

Management fee schedules and categories; total expenses

The Trustees reviewed the management fee schedules in effect for all Putnam funds, including fee levels and breakpoints, and the assignment of funds to particular fee categories. In reviewing fees and expenses, the Trustees generally focused their attention on material changes in circumstances —for example, changes in a fund’s size or investment style, changes in Putnam Management’s operating costs or responsibilities, or changes in competitive practices in the mutual fund industry — that suggest that consideration of fee changes might be warranted. The Trustees concluded that the circumstances did not warrant changes to the management fee structure of your fund, which had been carefully developed over the years, re-examined on many occasions and adjusted where appropriate. The Trustees focused on two areas of particular interest, as discussed further below:

• Competitiveness. The Trustees reviewed comparative fee and expense information for competitive funds, which indicated that, in a custom peer group of competitive funds selected by Lipper Inc., your fund ranked in the 69th percentile in management fees and in the 34th percentile in total expenses (less any applicable 12b-1 fees) as of December 31, 2006 (the first percentile being the least expensive funds and the 100th percentile being the most expensive funds). (Because the fund’s custom peer group is smaller than the fund’s broad Lipper Inc. peer group, this expense information may differ from the Lipper peer expense information found elsewhere in this report.) The Trustees noted that expense ratios for a number of Putnam funds, which show the percentage of fund assets used to pay for management and administrative services, distribution (12b-1) fees and other expenses, had been increasing recently as a result of declining net assets and the natural operation of fee breakpoints.

The Trustees noted that the expense ratio increases described above were currently being controlled by expense limitations implemented in January 2004 and which Putnam Management had committed to maintain at least through 2007. In anticipation of the change of control of Putnam Investments, the Trustees requested, and received a commitment from Putnam Management and Great-West Lifeco, to extend this program through at least June 30, 2009. These expense limitations give effect to a commitment by Putnam Management that the expense ratio of each open-end fund would be no higher than the average expense ratio of the competitive funds included in the fund’s relevant Lipper universe (exclusive of any applicable 12b-1 charges in each case). The Trustees observed that this commitment to limit fund expenses has served shareholders well since its inception.

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In order to ensure that the expenses of the Putnam funds continue to meet evolving competitive standards, the Trustees requested, and Putnam Management agreed, to extend for the twelve months beginning July 1, 2007, an additional expense limitation for certain funds at an amount equal to the average expense ratio (exclusive of 12b-1 charges) of a custom peer group of competitive funds selected by Lipper to correspond to the size of the fund. This additional expense limitation will be applied to those open-end funds that had above-average expense ratios (exclusive of 12b-1 charges) based on the custom peer group data for the period ended December 31, 2006. This additional expense limitation will not be applied to your fund because it had a below-average expense ratio relative to its custom peer group.

• Economies of scale. Your fund currently has the benefit of breakpoints in its management fee that provide shareholders with significant economies of scale, which means that the effective management fee rate of a fund (as a percentage of fund assets) declines as a fund grows in size and crosses specified asset thresholds. Conversely, as a fund shrinks in size — as has been the case for many Putnam funds in recent years — these breakpoints result in increasing fee levels. In recent years, the Trustees have examined the operation of the existing breakpoint structure during periods of both growth and decline in asset levels. The Trustees concluded that the fee schedules in effect for the funds represented an appropriate sharing of economies of scale at current asset levels. In reaching this conclusion, the Trustees considered the Contract Committee’s stated intent to continue to work with Putnam Management to plan for an eventual resumption in the growth of assets, and to consider the potential economies that might be produced under various growth assumptions.

In connection with their review of the management fees and total expenses of the Putnam funds, the Trustees also reviewed the costs of the services to be provided and profits to be realized by Putnam Management and its affiliates from the relationship with the funds. This information included trends in revenues, expenses and profitability of Putnam Management and its affiliates relating to the investment management and distribution services provided to the funds. In this regard, the Trustees also reviewed an analysis of Putnam Management’s revenues, expenses and profitability with respect to the funds’ management contracts, allocated on a fund-by-fund basis.

Investment performance during the Trustees’ review period

The quality of the investment process provided by Putnam Management represented a major factor in the Trustees’ evaluation of the quality of services provided by Putnam Management under your fund’s management contract. The Trustees were assisted in their review of the Putnam funds’ investment process and performance by the work of the Investment Process Committee of the Trustees and the Investment Oversight Committees of the Trustees, which had met on a regular monthly basis with the funds’ portfolio teams throughout the year. The Trustees concluded that Putnam Management generally provides a high-quality investment process — as measured by the experience and skills of the individuals assigned to the management of fund portfolios, the resources made available to such personnel, and in general the ability of Putnam Management to

24

attract and retain high-quality personnel — but also recognized that this does not guarantee favorable investment results for every fund in every time period. The Trustees considered the investment performance of each fund over multiple time periods and considered information comparing each fund’s performance with various benchmarks and with the performance of competitive funds.

The Trustees noted the satisfactory investment performance of many Putnam funds. They also noted the disappointing investment performance of certain funds in recent years and discussed with senior management of Putnam Management the factors contributing to such underperformance and actions being taken to improve performance. The Trustees recognized that, in recent years, Putnam Management has made significant changes in its investment personnel and processes and in the fund product line to address areas of underperformance. In particular, they noted the important contributions of Putnam Management’s leadership in attracting, retaining and supporting high-quality investment professionals and in systematically implementing an investment process that seeks to merge the best features of fundamental and quantitative analysis. The Trustees indicated their intention to continue to monitor performance trends to assess the effectiveness of these changes and to evaluate whether additional changes to address areas of underperformance are warranted.

In the case of your fund, the Trustees considered that your fund’s class A share cumulative total return performance at net asset value was in the following percentiles of its Lipper Inc. peer group (Lipper High Current Yield Funds) for the one-year, three-year and five-year periods ended March 31, 2007 (the first percentile being the best-performing funds and the 100th percentile being the worst-performing funds):

One-year period Three-year period Five-year period
4th 13th 19th

(Because of the passage of time, these performance results may differ from the performance results for more recent periods shown elsewhere in this report. Over the one-, three- and five-year periods ended March 31, 2007, there were 445, 382, and 315 funds, respectively, in your fund’s Lipper peer group.* Past performance is no guarantee of future returns.)

As a general matter, the Trustees concluded that cooperative efforts between the Trustees and Putnam Management represent the most effective way to address investment performance problems. The Trustees noted that investors in the Putnam funds have, in effect, placed their trust in the Putnam organization, under the oversight of the funds’ Trustees, to make appropriate decisions regarding the management of the funds. Based on the responsiveness of Putnam Management in the recent past to Trustee concerns about investment performance,

* The percentile rankings for your fund’s class A share annualized total return performance in the Lipper High Current Yield Funds category for the 1-year, 5-year, and 10-year periods ended June 30, 2008, were 24%, 9%, and 51%, respectively. Over the 1-year, 5-year, and 10-year periods ended June 30, 2008, the fund ranked 108th out of 460, 28th out of 339, and 85th out of 167 funds, respectively. Note that this more recent information was not available when the Trustees approved the continuance of your fund’s management contract.

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the Trustees concluded that it is preferable to seek change within Putnam Management to address performance shortcomings. In the Trustees’ view, the alternative of terminating a management contract and engaging a new investment adviser for an underperforming fund would entail significant disruptions and would not provide any greater assurance of improved investment performance.

Brokerage and soft-dollar allocations; other benefits

The Trustees considered various potential benefits that Putnam Management may receive in connection with the services it provides under the management contract with your fund. These include benefits related to brokerage and soft-dollar allocations, whereby a portion of the commissions paid by a fund for brokerage may be used to acquire research services that may be useful to Putnam Management in managing the assets of the fund and of other clients. The Trustees indicated their continued intent to monitor the potential benefits associated with the allocation of fund brokerage to ensure that the principle of seeking “best price and execution” remains paramount in the portfolio trading process.

The Trustees’ annual review of your fund’s management contract also included the review of its distributor’s contract and distribution plan with Putnam Retail Management Limited Partnership and the custodian agreement and investor servicing agreement with Putnam Fiduciary Trust Company (“PFTC”), each of which provides benefits to affiliates of Putnam Management. In the case of the custodian agreement, the Trustees considered that, effective January 1, 2007, the Putnam funds had engaged State Street Bank and Trust Company as custodian and began to transition the responsibility for providing custody services away from PFTC.

Comparison of retail and institutional fee schedules

The information examined by the Trustees as part of their annual contract review has included for many years information regarding fees charged by Putnam Management and its affiliates to institutional clients such as defined benefit pension plans, college endowments, etc. This information included comparison of such fees with fees charged to the funds, as well as a detailed assessment of the differences in the services provided to these two types of clients. The Trustees observed, in this regard, that the differences in fee rates between institutional clients and the funds are by no means uniform when examined by individual asset sectors, suggesting that differences in the pricing of investment management services to these types of clients reflect to a substantial degree historical competitive forces operating in separate market places. The Trustees considered the fact that fee rates across all asset sectors are higher on average for funds than for institutional clients, as well as the differences between the services that Putnam Management provides to the Putnam funds and those that it provides to institutional clients of the firm, but did not rely on such comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.

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Other information
for shareholders

Important notice regarding delivery of shareholder documents

In accordance with SEC regulations, Putnam sends a single copy of annual and semiannual shareholder reports, prospectuses, and proxy statements to Putnam shareholders who share the same address, unless a shareholder requests otherwise. If you prefer to receive your own copy of these documents, please call Putnam at 1-800-225-1581, and Putnam will begin sending individual copies within 30 days.

Proxy voting

Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds’ proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2007, are available in the Individual Investors section of www.putnam.com, and on the SEC’s Web site, www.sec.gov. If you have questions about finding forms on the SEC’s Web site, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds’ proxy voting guidelines and procedures at no charge by calling Putnam’s Shareholder Services at 1-800-225-1581.

Fund portfolio holdings

The fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund’s Forms N-Q on the SEC’s Web site at www.sec.gov. In addition, the fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC’s Web site or the operation of the Public Reference Room.

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Financial statements

A guide to financial statements

These sections of the report, as well as the accompanying Notes, constitute the fund’s financial statements.

The fund’s portfolio lists all the fund’s investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification.

Statement of assets and liabilities shows how the fund’s net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the liquidation preference of preferred shares.)

Statement of operations shows the fund’s net investment gain or loss. This is done by first adding up all the fund’s earnings — from dividends and interest income — and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings — as well as any unrealized gains or losses over the period — is added to or subtracted from the net investment result to determine the fund’s net gain or loss for the fiscal period.

Statement of changes in net assets shows how the fund’s net assets were affected by the fund’s net investment gain or loss, by distributions to shareholders, and by changes in the number of the fund’s shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned. Dividend sources are estimated at the time of declaration. Actual results may vary. Any non-taxable return of capital cannot be determined until final tax calculations are completed after the end of the fund’s fiscal year.

Financial highlights provide an overview of the fund’s investment results, per-share distributions, expense ratios, net investment income ratios, and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period.

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The fund’s portfolio 5/31/08 (Unaudited)

CORPORATE BONDS AND NOTES (82.0%)*        
 
    Principal amount   Value
Advertising and Marketing Services (0.4%)        
Lamar Media Corp. company guaranty 7 1/4s, 2013 (S) $ 2,610,000 $ 2,570,850
Lamar Media Corp. sr. unsec. sub. notes Ser. C,        
6 5/8s, 2015   565,000   532,513
        3,103,363
 
Automotive (4.3%)        
Allison Transmission 144A company guaranty 11s, 2015   2,555,000   2,408,088
ArvinMeritor, Inc. sr. unsec. notes 8 1/8s, 2015   380,000   324,425
Dana Corp. 5.85s, 2015   2,135,000   117,425
Ford Motor Co. notes 7.45s, 2031   1,445,000   1,000,663
Ford Motor Credit Co., LLC notes 7 7/8s, 2010   3,200,000   3,032,246
Ford Motor Credit Co., LLC notes 7.8s, 2012   405,000   358,318
Ford Motor Credit Co., LLC sr. notes 9 7/8s, 2011   7,425,000   7,051,578
Ford Motor Credit Co., LLC sr. unsec. notes 9 3/4s, 2010 (S)   1,970,000   1,921,745
Ford Motor Credit Co., LLC unsec. notes 7 3/8s, 2009   1,345,000   1,309,961
General Motors Corp. sr. unsec. unsub. notes 7.2s, 2011   6,515,000   5,472,600
Lear Corp. company guaranty 8 1/2s, 2013   1,955,000   1,818,150
Meritor Automotive, Inc. notes 6.8s, 2009   1,637,000   1,614,491
Tenneco Automotive, Inc. company guaranty 8 5/8s, 2014 (S)   1,810,000   1,791,900
Tenneco Automotive, Inc. sec. notes Ser. B, 10 1/4s, 2013   105,000   110,250
Tenneco, Inc. 144A sr. unsec. notes 8 1/8s, 2015   1,170,000   1,181,700
TRW Automotive, Inc. 144A company        
guaranty sr. notes 7 1/4s, 2017   1,845,000   1,725,075
UCI Holdco, Inc. sr. unsec. notes FRN 10.3s, 2013 ‡‡   1,167,175   1,035,868
        32,274,483
 
Basic Materials (7.3%)        
AK Steel Corp. company guaranty 7 3/4s, 2012   2,525,000   2,569,188
Aleris International, Inc. company guaranty 10s, 2016   1,090,000   782,075
Aleris International, Inc. company guaranty 9s, 2014 ‡‡   1,905,000   1,557,338
Algoma Acquisition Corp. 144A unsec. notes 9 7/8s,        
2015 (Canada)   675,000   637,875
Builders FirstSource, Inc. company guaranty sr. sec.        
notes FRN 6.926s, 2012   1,675,000   1,231,125
Century Aluminum Co. company guaranty 7 1/2s, 2014   1,810,000   1,800,950
Clondalkin Acquisition BV 144A company        
guaranty sr. sec. notes FRN 4.8s, 2013 (Netherlands)   1,165,000   1,023,744
Freeport-McMoRan Copper & Gold, Inc. sr. unsec.        
notes 8 3/8s, 2017   4,070,000   4,375,250
Freeport-McMoRan Copper & Gold, Inc. sr. unsec.        
notes 8 1/4s, 2015   2,030,000   2,146,725
Freeport-McMoRan Copper & Gold, Inc. sr. unsec.        
notes FRN 5.883s, 2015   715,000   715,004
Georgia-Pacific Corp. debs. 9 1/2s, 2011   1,900,000   1,995,000
Georgia-Pacific Corp. 144A company guaranty 7 1/8s, 2017   140,000   138,250

29

CORPORATE BONDS AND NOTES (82.0%)* continued        
    Principal amount   Value
Basic Materials continued        
Gerdau Ameristeel Corp. sr. notes 10 3/8s, 2011 (Canada) $ 2,007,000 $ 2,102,333
Hercules, Inc. company guaranty 6 3/4s, 2029   1,630,000   1,556,650
Hexion U.S. Finance Corp./Hexion Nova Scotia        
Finance, ULC company guaranty 9 3/4s, 2014   1,225,000   1,347,500
Huntsman International, LLC company        
guaranty sr. unsec. sub. notes 7 7/8s, 2014   1,650,000   1,765,500
Huntsman, LLC company guaranty 11 5/8s, 2010   3,000   3,188
International Paper Co. bonds 7.4s, 2014 ##   1,345,000   1,338,658
Jefferson Smurfit Corp. company guaranty 8 1/4s, 2012   540,000   496,800
Metals USA, Inc. sec. notes 11 1/8s, 2015   1,855,000   1,938,475
Momentive Performance Materials, Inc. company        
guaranty sr. unsec. notes 9 3/4s, 2014   4,315,000   4,002,163
Mosaic Co. (The) 144A sr. unsec.        
unsub. notes 7 5/8s, 2016   2,235,000   2,424,975
Mosaic Co. (The) 144A sr. unsec.        
unsub. notes 7 3/8s, 2014   670,000   706,850
NewPage Corp. company guaranty 10s, 2012   1,210,000   1,288,650
NewPage Corp. sec. notes 10s, 2012   905,000   963,825
NewPage Holding Corp. sr. notes FRN 9.986s, 2013 ‡‡   566,186   554,155
Norske Skog Canada, Ltd. company guaranty Ser. D,        
8 5/8s, 2011 (Canada)   1,670,000   1,444,550
Novelis, Inc. company guaranty 7 1/4s, 2015   2,860,000   2,688,400
Rockwood Specialties Group, Inc. company        
guaranty 7 5/8s, 2014 EUR 1,130,000   1,676,752
Smurfit-Stone Container Enterprises, Inc. sr. unsec.        
unsub. notes 8s, 2017 $ 1,240,000   1,069,500
Steel Dynamics, Inc. company guaranty sr. unsec.        
unsub. notes 6 3/4s, 2015   2,900,000   2,834,750
Steel Dynamics, Inc. 144A sr. notes 7 3/4s, 2016   1,085,000   1,087,713
Steel Dynamics, Inc. 144A sr. notes 7 3/8s, 2012   310,000   312,325
Stone Container Corp. sr. notes 8 3/8s, 2012   1,555,000   1,446,150
Tube City IMS Corp. company guaranty 9 3/4s, 2015   1,530,000   1,461,150
Ucar Finance, Inc. company guaranty 10 1/4s, 2012   38,000   39,520
Verso Paper Holdings, LLC/ Verso Paper, Inc. company        
guaranty 11 3/8s, 2016   855,000   865,688
        54,388,744
 
Broadcasting (2.0%)        
Clear Channel Communications, Inc. sr. unsec.        
notes 5 1/2s, 2014   285,000   186,675
DirecTV Holdings, LLC company guaranty 6 3/8s, 2015   3,715,000   3,524,606
Echostar DBS Corp. company guaranty 7 1/8s, 2016   125,000   119,375
Echostar DBS Corp. company guaranty 7s, 2013   1,495,000   1,446,413
Echostar DBS Corp. company guaranty 6 5/8s, 2014   235,000   221,488
Echostar DBS Corp. sr. notes 6 3/8s, 2011   3,790,000   3,742,625
Ion Media Networks, Inc. 144A sr. sec. notes 8.963s, 2013   995,000   626,850
Ion Media Networks, Inc. 144A sr. sec. notes 5.963s, 2012   1,175,000   981,125
Sinclair Broadcast Group, Inc. company guaranty 8s, 2012   60,000   61,200

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CORPORATE BONDS AND NOTES (82.0%)* continued        
    Principal amount   Value
Broadcasting continued        
Sirius Satellite Radio, Inc. sr. unsec.        
notes 9 5/8s, 2013 $ 2,060,000 $ 1,766,450
Univision Communications, Inc. 144A company        
guaranty unsec. notes 9 3/4s, 2015 ‡‡   1,460,000   1,102,300
Young Broadcasting, Inc. company guaranty 10s, 2011   1,142,000   765,140
Young Broadcasting, Inc. sr. sub. notes 8 3/4s, 2014   395,000   229,100
        14,773,347
 
Building Materials (0.8%)        
Associated Materials, Inc. company guaranty 9 3/4s, 2012   1,550,000   1,542,250
NTK Holdings, Inc. sr. disc. notes zero%, 2014   1,765,000   875,881
Texas Industries, Inc. sr. unsec. notes 7 1/4s, 2013   715,000   716,788
THL Buildco, Inc. (Nortek Holdings, Inc.)        
sr. sub. notes 8 1/2s, 2014   3,495,000   2,446,500
THL Buildco, Inc. (Nortek Holdings, Inc.) 144A        
sr. sec. notes 10s, 2013 (S)   345,000   342,844
        5,924,263
 
Cable Television (2.5%)        
Atlantic Broadband Finance, LLC company        
guaranty 9 3/8s, 2014   710,000   660,300
Cablevision Systems Corp. sr. notes Ser. B, 8s, 2012   655,000   636,988
CCH I Holdings, LLC company guaranty 12 1/8s, 2015   25,000   16,250
CCH I, LLC sec. notes 11s, 2015   5,684,000   4,831,400
CCH II, LLC sr. unsec. notes 10 1/4s, 2010   1,160,000   1,154,200
CCH II, LLC sr. unsec. notes Ser. B, 10 1/4s, 2010   4,920,000   4,889,250
CSC Holdings, Inc. sr. notes 6 3/4s, 2012   3,015,000   2,924,550
CSC Holdings, Inc. sr. notes Ser. B, 7 5/8s, 2011   420,000   420,000
Mediacom LLC/Mediacom Capital Corp. sr. unsec.        
notes 9 1/2s, 2013   830,000   792,650
NTL Cable PLC sr. notes 9 1/8s, 2016 (United Kingdom)   930,000   911,400
Rainbow National Services, LLC 144A        
sr. notes 8 3/4s, 2012   1,730,000   1,773,250
        19,010,238
 
Capital Goods (7.0%)        
Alliant Techsystems, Inc. sr. sub. notes 6 3/4s, 2016   2,200,000   2,172,500
Allied Waste North America, Inc. sec. notes 6 1/2s,        
2010   955,000   963,356
Baldor Electric Co. company guaranty 8 5/8s, 2017   520,000   533,000
BBC Holding Corp. sr. notes 8 7/8s, 2014   1,450,000   1,326,750
Berry Plastics Corp. 144A sr. sec. notes FRN 7.568s, 2015   1,430,000   1,387,100
Blount, Inc. sr. sub. notes 8 7/8s, 2012   2,160,000   2,192,400
Bombardier, Inc. 144A sr. notes 8s, 2014 (Canada)   1,525,000   1,601,250
Bombardier, Inc. 144A sr. unsec. notes FRN 7.631s,        
2013 (Canada) EUR 1,195,000   1,877,848
Crown Americas, LLC/Crown Americas Capital Corp.        
sr. notes 7 5/8s, 2013 $ 1,105,000   1,138,150

31

CORPORATE BONDS AND NOTES (82.0%)* continued        
    Principal amount   Value
Capital Goods continued        
General Cable Corp. company guaranty sr. unsec.        
notes FRN 5.073s, 2015 $ 1,900,000 $ 1,700,500
Greenbrier Cos., Inc. company guaranty 8 3/8s, 2015   1,475,000   1,419,688
Hawker Beechcraft Acquisition Co., LLC        
sr. sub. notes 9 3/4s, 2017   1,720,000   1,763,000
Hawker Beechcraft Acquisition Co., LLC sr. unsec.        
notes 8 7/8s, 2015 ‡‡   1,070,000   1,091,400
Hawker Beechcraft Acquisition Co., LLC sr. unsec.        
notes 8 1/2s, 2015   310,000   318,525
Hexcel Corp. sr. sub. notes 6 3/4s, 2015   2,855,000   2,847,863
L-3 Communications Corp. company guaranty        
6 1/8s, 2013   1,585,000   1,537,450
L-3 Communications Corp. company guaranty Ser. B,        
6 3/8s, 2015   2,985,000   2,876,794
L-3 Communications Corp. sr. sub. notes 5 7/8s, 2015   575,000   544,813
Legrand SA unsec. unsub. debs. 8 1/2s, 2025 (France)   3,605,000   3,814,386
Manitowoc Co., Inc. (The) sr. notes 7 1/8s, 2013   1,185,000   1,143,525
Moog, Inc. 144A sr. sub. notes 7 1/4s, 2018   770,000   777,700
Owens-Brockway Glass Container, Inc. company        
guaranty 6 3/4s, 2014 EUR 995,000   1,491,135
RBS Global, Inc. / Rexnord Corp. company        
guaranty 9 1/2s, 2014 $ 3,100,000   3,107,750
Ryerson Tull, Inc. 144A sec. notes 12s, 2015   2,230,000   2,163,100
TD Funding Corp. company guaranty 7 3/4s, 2014   2,510,000   2,566,475
Tekni-Plex, Inc. sec. notes 10 7/8s, 2012   2,525,000   2,550,250
Terex Corp. company guaranty 7 3/8s, 2014   3,285,000   3,317,850
Titan International, Inc. company guaranty 8s, 2012   3,280,000   3,304,600
WCA Waste Corp. company guaranty 9 1/4s, 2014   1,230,000   1,242,300
        52,771,458
 
Coal (1.5%)        
Arch Western Finance, LLC sr. notes 6 3/4s, 2013   4,165,000   4,112,938
Massey Energy Co. sr. notes 6 5/8s, 2010   3,330,000   3,321,675
Peabody Energy Corp. company guaranty 7 3/8s, 2016   4,020,000   4,110,450
        11,545,063
 
Communication Services (6.7%)        
American Tower Corp. sr. notes 7 1/2s, 2012   1,020,000   1,037,850
American Tower Corp. 144A sr. notes 7s, 2017   705,000   703,238
BCM Ireland Finance Ltd. 144A FRN 9.506s, 2016        
(Cayman Islands) EUR 630,000   916,208
Centennial Cellular Operating Co., LLC company        
guaranty 10 1/8s, 2013 $ 845,000   878,800
Centennial Communications Corp. sr. notes 10s, 2013   885,000   885,000
Centennial Communications Corp. sr. unsec. notes FRN        
8.448s, 2013   420,000   400,050
Cincinnati Bell, Inc. company guaranty 7s, 2015   1,005,000   969,825
Citizens Communications Co. notes 9 1/4s, 2011   1,660,000   1,740,925

32

CORPORATE BONDS AND NOTES (82.0%)* continued        
 
    Principal amount   Value
Communication Services continued        
Cricket Communications, Inc. company        
guaranty 9 3/8s, 2014 $ 2,945,000 $ 2,841,925
Cricket Communications, Inc. 144A company        
guaranty 9 7/8s, 2014   245,000   236,425
Digicel Group, Ltd. 144A sr. unsec. notes 8 7/8s,        
2015 (Jamaica)   1,100,000   1,009,250
Digicel, Ltd. 144A sr. unsec. unsub. notes 9 1/4s,        
2012 (Jamaica)   1,375,000   1,412,813
Hawaiian Telcom Communications, Inc. company        
guaranty Ser. B, 9 3/4s, 2013   10,000   3,900
Inmarsat Finance PLC company guaranty stepped-coupon        
zero% (10 3/8s, 11/15/08), 2012 (United Kingdom) ††   3,001,000   3,001,000
Intelsat Bermuda, Ltd. company guaranty sr. unsec.        
notes 11 1/4s, 2016 (Bermuda)   4,565,000   4,684,831
Intelsat Intermediate Holding Co., Ltd. company        
guaranty stepped-coupon zero% (9 1/4s, 2/1/10),        
2015 (Bermuda) ††   690,000   583,050
iPCS, Inc. company guaranty sr. sec. notes FRN        
4.998s, 2013   680,000   584,800
Level 3 Financing, Inc. company guaranty 9 1/4s, 2014   2,520,000   2,356,200
Level 3 Financing, Inc. company guaranty 8 3/4s, 2017   1,070,000   944,275
MetroPCS Wireless, Inc. company guaranty sr. unsec.        
notes 9 1/4s, 2014   3,445,000   3,311,506
Nordic Telephone Co. Holdings 144A sr. sec. bond        
8 7/8s, 2016 (Denmark)   455,000   448,175
PAETEC Holding Corp. company guaranty sr. unsec.        
unsub. notes 9 1/2s, 2015   695,000   653,300
Qwest Communications International, Inc. company        
guaranty 7 1/2s, 2014   2,650,000   2,597,000
Qwest Corp. sr. unsec. unsub. notes 8 7/8s, 2012   3,555,000   3,723,863
Qwest Corp. sr. unsec. unsub. notes 7 1/4s, 2025   1,135,000   1,047,038
Rural Cellular Corp. sr. unsec. notes 9 7/8s, 2010   665,000   681,625
Rural Cellular Corp. sr. unsec. sub. FRN 8.623s, 2012   545,000   554,538
Rural Cellular Corp. sr. unsec. sub. notes FRN        
6.076s, 2013   935,000   944,350
Syniverse Technologies, Inc. sr. sub. notes Ser. B,        
7 3/4s, 2013   1,330,000   1,276,800
Time Warner Telecom, Inc. company guaranty 9 1/4s,        
2014   930,000   962,550
West Corp. company guaranty 11s, 2016   520,000   460,200
West Corp. company guaranty 9 1/2s, 2014   1,710,000   1,598,850
Wind Acquisition Fin. SA notes 9 3/4s, 2015        
(Netherlands) EUR 860,000   1,414,559
Windstream Corp. company guaranty 8 5/8s, 2016 $ 3,475,000   3,592,281
Windstream Corp. company guaranty 8 1/8s, 2013   1,530,000   1,564,425
        50,021,425

33

CORPORATE BONDS AND NOTES (82.0%)* continued        
    Principal amount   Value
Consumer (0.6%)        
Jostens IH Corp. company guaranty 7 5/8s, 2012 $ 2,625,000 $ 2,621,719
Yankee Acquisition Corp. company guaranty Ser. B,        
8 1/2s, 2015 (S)   2,680,000   2,187,550
        4,809,269
 
Consumer Goods (1.6%)        
Church & Dwight Co., Inc. company guaranty 6s, 2012   1,805,000   1,777,925
Elizabeth Arden, Inc. company guaranty 7 3/4s, 2014   1,945,000   1,847,750
Jarden Corp. company guaranty 7 1/2s, 2017 (S)   3,185,000   2,842,613
Prestige Brands, Inc. sr. sub. notes 9 1/4s, 2012   2,533,000   2,533,000
Spectrum Brands, Inc. company guaranty 7 3/8s, 2015   2,490,000   1,693,200
Spectrum Brands, Inc. company guaranty sr. unsec.        
sub. notes stepped-coupon 11s (12s, 10/2/08), 2013 †† ‡‡   1,370,000   1,219,300
        11,913,788
 
Consumer Services (0.2%)        
United Rentals NA, Inc. company guaranty 6 1/2s, 2012   1,420,000   1,309,950
 
Energy (3.1%)        
CHC Helicopter Corp. sr. sub. notes 7 3/8s, 2014        
(Canada)   3,185,000   3,224,813
Complete Production Services, Inc. company        
guaranty 8s, 2016   2,875,000   2,910,938
Dresser-Rand Group, Inc. company guaranty 7 3/8s, 2014   285,000   283,575
Helix Energy Solutions Group, Inc. 144A sr. unsec.        
notes 9 1/2s, 2016 (S)   3,040,000   3,161,600
Hornbeck Offshore Services, Inc. sr. notes Ser. B,        
6 1/8s, 2014 (S)   955,000   919,188
Inergy LP/Inergy Finance Corp. sr. unsec.        
notes 6 7/8s, 2014   3,720,000   3,589,800
Key Energy Services, Inc. 144A sr. notes 8 3/8s, 2014   1,405,000   1,450,663
Offshore Logistics, Inc. company guaranty 6 1/8s, 2013   1,455,000   1,404,075
Oslo Seismic Services, Inc. 1st mtge. 8.28s, 2011   1,333,042   1,391,293
Pacific Energy Partners/Pacific Energy Finance Corp.        
sr. notes 7 1/8s, 2014   1,350,000   1,357,317
Pride International, Inc. sr. unsec. notes 7 3/8s, 2014   1,250,000   1,271,875
Stallion Oilfield Services/Stallion Oilfield        
Finance Corp. 144A sr. unsec. notes 9 3/4s, 2015   3,095,000   2,561,113
        23,526,250
 
Entertainment (1.2%)        
AMC Entertainment, Inc. company guaranty 11s, 2016   1,061,000   1,076,915
Avis Budget Car Rental, LLC company guaranty 7 3/4s, 2016   1,475,000   1,264,813
Avis Budget Car Rental, LLC company guaranty 7 5/8s, 2014   965,000   868,500
Cinemark, Inc. sr. disc. notes stepped-coupon zero%        
(9 3/4s, 3/15/09), 2014 ††   1,425,000   1,353,750
Hertz Corp. company guaranty 8 7/8s, 2014 (S)   1,940,000   1,930,300
Marquee Holdings, Inc. sr. disc. notes 12s, 2014   1,840,000   1,481,200

34

CORPORATE BONDS AND NOTES (82.0%)* continued        
    Principal amount   Value
Entertainment continued        
Universal City Florida Holding Co. sr. notes 8 3/8s, 2010 $ 245,000 $ 243,163
Universal City Florida Holding Co. sr. unsec.        
notes FRN 7.623s, 2010   1,110,000   1,090,575
        9,309,216
 
Financial (3.0%)        
E*Trade Financial Corp. sr. unsec. notes 8s, 2011   2,455,000   2,258,600
GMAC, LLC sr. unsec. unsub. notes FRN 5.276s, 2014   255,000   181,453
GMAC, LLC sr. unsec. unsub. notes 7 3/4s, 2010 (S)   5,565,000   5,222,830
GMAC, LLC sr. unsec. unsub. notes 7s, 2012   605,000   489,796
GMAC, LLC sr. unsec. unsub. notes 6 7/8s, 2012 (S)   5,980,000   4,816,824
GMAC, LLC sr. unsec. unsub. notes 6 3/4s, 2014   4,524,000   3,502,571
GMAC, LLC sr. unsec. unsub. notes 6 5/8s, 2012   1,600,000   1,265,227
HUB International Holdings, Inc. 144A        
sr. sub. notes 10 1/4s, 2015   555,000   410,700
HUB International Holdings, Inc. 144A sr. unsec.        
unsub. notes 9s, 2014   320,000   278,400
Leucadia National Corp. sr. unsec. notes 8 1/8s, 2015   510,000   522,113
Leucadia National Corp. sr. unsec. notes 7 1/8s, 2017   1,460,000   1,401,600
Liberty Mutual Group 144A company guaranty FRB        
10 3/4s, 2058   815,000   801,191
Nuveen Investments, Inc. 144A sr. notes 10 1/2s, 2015   1,195,000   1,123,300
Rouse Co LP/TRC Co-Issuer Inc. 144A        
sr. notes 6 3/4s, 2013 (R)   180,000   161,192
USI Holdings Corp. 144A sr. unsec. notes FRN 6.551s, 2014   330,000   265,650
        22,701,447
 
Food (0.9%)        
Archibald Candy Corp. company guaranty 10s,        
2008 (In default) (F) †   424,297   6,233
Chiquita Brands International, Inc.        
sr. notes 7 1/2s, 2014   2,060,000   1,823,100
Chiquita Brands International, Inc. sr. unsec.        
unsub. notes 8 7/8s, 2015   290,000   268,250
Dean Foods Co. company guaranty 7s, 2016   1,385,000   1,291,513
Del Monte Corp. sr. sub. notes 8 5/8s, 2012   2,625,000   2,690,625
Pinnacle Foods Finance LLC sr. notes 9 1/4s, 2015   160,000   147,200
Pinnacle Foods Finance LLC sr. sub. notes 10 5/8s, 2017   885,000   761,100
        6,988,021
 
Gaming & Lottery (3.0%)        
Boyd Gaming Corp. sr. sub. notes 7 1/8s, 2016   2,110,000   1,651,075
Boyd Gaming Corp. sr. sub. notes 6 3/4s, 2014   1,020,000   852,975
Isle of Capri Casinos, Inc. company guaranty 7s, 2014   25,000   19,063
Mashantucket Western Pequot Tribe 144A bonds        
8 1/2s, 2015   1,995,000   1,845,375
MGM Mirage, Inc. company guaranty 8 1/2s, 2010   1,670,000   1,705,488
MGM Mirage, Inc. company guaranty 6s, 2009   3,440,000   3,418,500

35

CORPORATE BONDS AND NOTES (82.0%)* continued        
 
    Principal amount   Value
Gaming & Lottery continued        
Pinnacle Entertainment, Inc. sr. sub. notes 8 1/4s, 2012 $ 2,037,000 $ 2,052,278
Pinnacle Entertainment, Inc. 144A        
sr. sub. notes 7 1/2s, 2015   1,890,000   1,559,250
Station Casinos, Inc. sr. notes 6s, 2012   2,740,000   2,301,600
Tropicana Entertainment, LLC sr. sub. notes 9 5/8s,        
2014 (In default) †   1,320,000   739,200
Trump Entertainment Resorts, Inc. sec. notes 8 1/2s, 2015   5,110,000   3,462,025
Wynn Las Vegas, LLC/Wynn Las Vegas Capital Corp. 1st        
mtge. 6 5/8s, 2014   2,620,000   2,528,300
        22,135,129
 
Health Care (7.6%)        
Accellent, Inc. company guaranty 10 1/2s, 2013   1,810,000   1,651,625
Community Health Systems, Inc. company        
guaranty 8 7/8s, 2015   4,275,000   4,408,594
DaVita, Inc. company guaranty 6 5/8s, 2013   1,820,000   1,769,950
Elan Finance PLC/Elan Finance Corp. company        
guaranty 7 3/4s, 2011 (Ireland)   2,975,000   2,900,625
HCA, Inc. company guaranty sr. sec. notes 9 5/8s, 2016 ‡‡   2,730,000   2,880,150
HCA, Inc. sr. sec. notes 9 1/4s, 2016   5,145,000   5,434,406
HCA, Inc. sr. sec. notes 9 1/8s, 2014   2,120,000   2,215,400
HCA, Inc. sr. unsec. notes 7 7/8s, 2011   930,000   932,325
Health Management Associates, Inc. sr. notes 6 1/8s, 2016   2,585,000   2,378,200
IASIS Healthcare/IASIS Capital Corp.        
sr. sub. notes 8 3/4s, 2014   660,000   678,150
Omnicare, Inc. company guaranty 6 3/4s, 2013   185,000   173,438
Omnicare, Inc. sr. sub. notes 6 1/8s, 2013   514,000   475,450
Psychiatric Solutions, Inc. company guaranty 7 3/4s, 2015   2,030,000   2,080,750
Select Medical Corp. company guaranty 7 5/8s, 2015   2,345,000   2,087,050
Service Corporation International debs. 7 7/8s, 2013   1,185,000   1,179,075
Service Corporation International sr. notes 7s, 2017   740,000   717,800
Service Corporation International sr. unsec.        
unsub. notes 6 3/4s, 2016   3,275,000   3,119,438
Stewart Enterprises, Inc. sr. notes 6 1/4s, 2013   3,010,000   2,889,600
Sun Healthcare Group, Inc. company        
guaranty sr. unsec. unsub. notes 9 1/8s, 2015   1,325,000   1,338,250
Surgical Care Affiliates, Inc. 144A        
sr. sub. notes 10s, 2017   1,540,000   1,108,800
Surgical Care Affiliates, Inc. 144A sr. unsec.        
notes 8 7/8s, 2015 ‡‡   625,000   506,250
Tenet Healthcare Corp. notes 7 3/8s, 2013   2,560,000   2,387,200
Tenet Healthcare Corp. sr. unsec.        
unsub. notes 6 3/8s, 2011   3,070,000   2,908,825
US Oncology, Inc. company guaranty 9s, 2012   2,800,000   2,831,500
Vanguard Health Holding Co. II, LLC        
sr. sub. notes 9s, 2014   3,111,000   3,196,553
Ventas Realty LP/Capital Corp. company guaranty 9s,        
2012 (R)   2,230,000   2,363,800

36

CORPORATE BONDS AND NOTES (82.0%)* continued        
 
    Principal amount   Value
Health Care continued        
Ventas Realty LP/Capital Corp. company        
guaranty 6 3/4s, 2010 (R) $ 865,000 $ 869,325
Ventas Realty LP/Capital Corp. sr. notes 6 5/8s, 2014 (R)   690,000   684,825
Ventas Realty LP/Capital Corp. sr. notes 6 1/2s, 2016 (R)   850,000   828,750
        56,996,104
 
Homebuilding (1.3%)        
D.R. Horton, Inc. company guaranty 8s, 2009   140,000   140,000
D.R. Horton, Inc. company        
guaranty sr. unsub. notes 5s, 2009   490,000   481,425
K. Hovnanian Enterprises, Inc. company        
guaranty sr. sec. notes 11 1/2s, 2013   695,000   722,800
Meritage Homes Corp. company guaranty 6 1/4s, 2015   1,725,000   1,414,500
Meritage Homes Corp. sr. notes 7s, 2014   245,000   207,638
Pulte Homes, Inc. notes 4 7/8s, 2009   2,315,000   2,315,000
Realogy Corp. company guaranty sr. unsec.        
notes 10 1/2s, 2014 (R)   4,515,000   3,386,250
Standard Pacific Corp. sr. unsec. notes 6 1/2s, 2008   1,475,000   1,456,563
        10,124,176
 
Household Furniture and Appliances (0.1%)        
Sealy Mattress Co. sr. sub. notes 8 1/4s, 2014   945,000   833,963
 
Lodging/Tourism (0.8%)        
FelCor Lodging LP company guaranty 8 1/2s, 2011 (R)   955,000   971,713
Host Marriott LP company guaranty Ser. Q, 6 3/4s,        
2016 (R)   450,000   436,500
Host Marriott LP sr. notes Ser. M, 7s, 2012 (R)   3,410,000   3,405,738
Seminole Hard Rock Entertainment, Inc. 144A sr. sec.        
notes FRN 5.3s, 2014   1,100,000   935,000
        5,748,951
 
Media (2.2%)        
Affinion Group, Inc. company guaranty 11 1/2s, 2015 (S)   930,000   945,113
Affinion Group, Inc. company guaranty 10 1/8s, 2013   2,685,000   2,745,413
Affinity Group, Inc. sr. sub. notes 9s, 2012   1,765,000   1,628,213
Idearc, Inc. company guaranty 8s, 2016   4,145,000   2,963,675
Liberty Media, LLC sr. notes 5.7s, 2013   680,000   622,191
Liberty Media, LLC sr. unsec. notes 7 7/8s, 2009   845,000   858,985
Nielsen Finance LLC/Nielsen Finance Co. company        
guaranty 10s, 2014   15,000   15,469
Nielsen Finance LLC/Nielsen Finance Co. company        
guaranty stepped-coupon zero% (12 1/2s, 8/1/11), 2016 ††   3,235,000   2,345,375
Nielsen Finance LLC/Nielsen Finance Co. 144A company        
guaranty sr. unsec. notes 10s, 2014   1,685,000   1,737,623
R.H. Donnelley Corp. sr. disc. notes Ser. A-1,        
6 7/8s, 2013   205,000   137,350
R.H. Donnelley Corp. sr. disc. notes Ser. A-2,        
6 7/8s, 2013   1,545,000   1,035,150

37

CORPORATE BONDS AND NOTES (82.0%)* continued        
    Principal amount   Value
 
Media continued        
R.H. Donnelley Corp. sr. unsec. notes 6 7/8s, 2013 $ 620,000 $ 415,400
R.H. Donnelley Corp. sr. unsec. unsub. notes 8 7/8s, 2017   1,045,000   700,150
        16,150,107
 
Oil & Gas (7.4%)        
Chaparral Energy, Inc. company guaranty 8 1/2s, 2015   444,000   392,940
Chaparral Energy, Inc. company guaranty sr. unsec.        
notes 8 7/8s, 2017   2,310,000   2,050,125
Chesapeake Energy Corp. company guaranty 6 1/2s, 2017   220,000   207,350
Chesapeake Energy Corp. sr. notes 7 1/2s, 2013   4,020,000   4,090,350
Chesapeake Energy Corp. sr. notes 7s, 2014   1,125,000   1,120,781
Compton Petroleum Corp. company guaranty 7 5/8s,        
2013 (Canada)   3,650,000   3,572,438
Comstock Resources, Inc. sr. notes 6 7/8s, 2012   2,015,000   1,979,738
Connacher Oil and Gas, Ltd. 144A sec. notes 10 1/4s,        
2015 (Canada)   2,360,000   2,489,800
Denbury Resources, Inc. sr. sub. notes 7 1/2s, 2015   1,730,000   1,751,625
Encore Acquisition Co. sr. sub. notes 6 1/4s, 2014   880,000   849,200
Encore Acquisition Co. sr. sub. notes 6s, 2015   2,295,000   2,180,250
EXCO Resources, Inc. company guaranty 7 1/4s, 2011   2,180,000   2,139,125
Forest Oil Corp. sr. notes 8s, 2011   3,105,000   3,248,606
Harvest Operations Corp. sr. notes 7 7/8s, 2011        
(Canada)   2,350,000   2,226,625
Hilcorp Energy I LP/Hilcorp Finance Co. 144A        
sr. unsec. notes 9s, 2016   770,000   798,875
Hilcorp Energy I LP/Hilcorp Finance Co. 144A        
sr. unsec. notes 7 3/4s, 2015   455,000   444,763
Newfield Exploration Co. sr. sub. notes 7 1/8s, 2018 (S)   860,000   849,250
Newfield Exploration Co. sr. sub. notes 6 5/8s, 2016   300,000   286,500
Newfield Exploration Co. sr. sub. notes 6 5/8s, 2014   2,530,000   2,454,100
PetroHawk Energy Corp. company guaranty 9 1/8s, 2013   3,630,000   3,775,200
Petroleum Development Corp. 144A sr. unsec.        
notes 12s, 2018   1,000,000   1,060,000
Petroplus Finance, Ltd. company guaranty 6 3/4s,        
2014 (Bermuda)   1,920,000   1,761,600
Plains Exploration & Production Co. company        
guaranty 7 3/4s, 2015   365,000   367,738
Plains Exploration & Production Co. company        
guaranty 7s, 2017 (S)   3,065,000   2,950,063
Quicksilver Resources, Inc. company guaranty 7 1/8s, 2016   1,555,000   1,516,125
Range Resources Corp. company        
guaranty sr. sub. notes 7 1/4s, 2018   810,000   824,175
Sabine Pass LNG LP sec. notes 7 1/2s, 2016   1,870,000   1,708,713
SandRidge Energy, Inc. sr. notes 8s, 2018   230,000   232,875
SandRidge Energy, Inc. 144A company        
guaranty sr. unsec. FRN 6.323s, 2014   675,000   651,654
SandRidge Energy, Inc. 144A company        
guaranty sr. unsec. notes 8 5/8s, 2015 ‡‡   1,885,000   1,936,838

38

CORPORATE BONDS AND NOTES (82.0%)* continued        
    Principal amount   Value
Oil & Gas continued        
Targa Resources, Inc. company guaranty sr. unsec.        
notes 8 1/2s, 2013 $ 3,135,000 $ 3,017,438
Whiting Petroleum Corp. company guaranty 7s, 2014   2,530,000   2,511,025
        55,445,885
 
Publishing (1.2%)        
American Media, Inc. company guaranty 8 7/8s, 2011   305,000   253,150
American Media, Inc. company guaranty Ser. B,        
10 1/4s, 2009   2,120,000   1,802,000
American Media, Inc. company guaranty sr. unsec.        
sub. notes 8 7/8s, 2011   11,090   9,537
American Media, Inc. 144A company        
guaranty sr. unsec. sub. notes 10 1/4s, 2009   77,083   65,521
CanWest Media, Inc. company guaranty 8s, 2012        
(Canada)   1,356,600   1,244,681
Cenveo Corp., sr. sub. notes 7 7/8s, 2013   795,000   689,663
Dex Media, Inc. disc. notes stepped-coupon zero%        
(9s, 11/15/08), 2013 ††   935,000   724,625
Dex Media, Inc. notes 8s, 2013   310,000   246,450
Quebecor Media, Inc. sr. unsec. notes Ser. *,        
7 3/4s, 2016 (Canada) (S)   410,000   401,800
Reader’s Digest Association, Inc. (The) 144A        
sr. sub. notes 9s, 2017   1,980,000   1,519,650
Vertis, Inc. company guaranty 9 3/4s, 2009   500,000   480,000
Vertis, Inc. company guaranty Ser. B, 10 7/8s, 2009   2,575,000   1,171,625
Vertis, Inc. 144A unsec. sub. notes 13 1/2s, 2009   880,000   106,700
        8,715,402
 
Restaurants (0.1%)        
Buffets, Inc. company guaranty 12 1/2s,        
2014 (In default) †   660,000   13,200
OSI Restaurant Partners, Inc. 144A sr. notes 10s, 2015   720,000   511,200
        524,400
 
Retail (2.1%)        
Asbury Automotive Group, Inc. sr. sub. notes 8s, 2014   1,925,000   1,746,938
Autonation, Inc. company guaranty 7s, 2014   380,000   359,575
Autonation, Inc. company guaranty sr. unsec.        
notes FRN 4.713s, 2013   980,000   866,075
Bon-Ton Stores, Inc. (The) company guaranty 10 1/4s, 2014   1,355,000   975,600
Claire’s Stores, Inc. 144A company        
guaranty sr. unsec. notes 9 5/8s, 2015   55,000   32,106
Harry & David Holdings, Inc. company guaranty 9s, 2013   1,355,000   1,192,400
Harry & David Holdings, Inc. company        
guaranty sr. unsec. notes FRN 8.076s, 2012   385,000   334,950
Michaels Stores, Inc. company guaranty 11 3/8s, 2016   2,095,000   1,801,700
Michaels Stores, Inc. company guaranty 10s, 2014   890,000   823,250
Neiman-Marcus Group, Inc. company guaranty 9s, 2015   2,760,000   2,822,100

39

CORPORATE BONDS AND NOTES (82.0%)* continued        
    Principal amount   Value
Retail continued        
Rite Aid Corp. company guaranty 9 1/2s, 2017 $ 125,000 $ 97,500
Rite Aid Corp. company guaranty 9 3/8s, 2015   2,095,000   1,634,100
Rite Aid Corp. company guaranty 7 1/2s, 2015   1,325,000   1,258,750
Rite Aid Corp. sec. notes 8 1/8s, 2010 (S)   270,000   269,325
Rite Aid Corp. sec. notes 7 1/2s, 2017   180,000   164,025
United Auto Group, Inc. company guaranty 7 3/4s, 2016   1,690,000   1,571,700
        15,950,094
 
Technology (5.6%)        
Activant Solutions, Inc. company guaranty 9 1/2s, 2016   985,000   751,063
Advanced Micro Devices, Inc. sr. notes 7 3/4s, 2012   1,498,000   1,295,770
Amkor Technologies, Inc. sr. notes 7 3/4s, 2013   1,955,000   1,876,800
Avago Technologies Finance company guaranty 11 7/8s,        
2015 (Singapore)   390,000   419,738
Avago Technologies Finance company guaranty 10 1/8s,        
2013 (Singapore)   395,000   424,625
Avago Technologies Finance company guaranty FRN        
8.576s, 2013 (Singapore)   7,000   6,991
Celestica, Inc. sr. sub. notes 7 7/8s, 2011 (Canada)   425,000   426,594
Celestica, Inc. sr. sub. notes 7 5/8s, 2013 (Canada)   705,000   694,425
Ceridian Corp. 144A sr. unsec. notes 11 1/4s, 2015   1,605,000   1,516,725
Compucom Systems, Inc. sr. sub. notes 12 1/2s, 2015   570,000   532,950
Freescale Semiconductor, Inc. company        
guaranty sr. unsec. notes 8 7/8s, 2014   4,380,000   3,876,300
Freescale Semiconductor, Inc. company        
guaranty sr. unsec. sub. notes 9 1/8s, 2014 ‡‡   1,970,000   1,689,275
Freescale Semiconductor, Inc. company        
guaranty sr. unsec. sub. notes 10 1/8s, 2016 (S)   1,970,000   1,659,725
Iron Mountain, Inc. company guaranty 8 3/4s, 2018   670,000   713,550
Iron Mountain, Inc. company guaranty 8 5/8s, 2013   2,310,000   2,341,763
Iron Mountain, Inc. sr. sub. notes 8 1/4s, 2011   175,000   175,000
Lucent Technologies, Inc. notes 5 1/2s, 2008   520,000   518,700
Lucent Technologies, Inc. unsec. debs. 6.45s, 2029   1,225,000   938,656
New ASAT Finance, Ltd. company guaranty 9 1/4s, 2011        
(Cayman Islands)   1,235,000   765,700
Nortel Networks, Ltd. 144A company guaranty sr. unsec.        
notes 10 3/4s, 2016 (Canada)   760,000   750,500
Nortel Networks, Ltd. company guaranty sr. unsec.        
notes 10 3/4s, 2016 (Canada)   575,000   567,813
Nortel Networks, Ltd. company guaranty sr. unsec.        
notes FRN 6.963s, 2011 (Canada)   2,415,000   2,270,100
NXP BV/NXP Funding, LLC company guaranty sr. sec.        
notes FRN 5.463s, 2013 (Netherlands) (S)   1,660,000   1,518,900
NXP BV/NXP Funding, LLC sec. notes 7 7/8s, 2014        
(Netherlands)   2,317,000   2,247,490
Open Solutions, Inc. 144A sr. sub. notes 9 3/4s, 2015   1,140,000   940,500
Sanmina Corp. company guaranty sr. unsec. sub        
notes 6 3/4s, 2013   290,000   267,525
Sanmina Corp. sr. unsec. sub. notes 8 1/8s, 2016   1,880,000   1,767,200

40

CORPORATE BONDS AND NOTES (82.0%)* continued        
    Principal amount   Value
 
Technology continued        
Seagate Technology Hdd Holdings company        
guaranty 6.8s, 2016 (Cayman Islands) $ 1,065,000 $ 1,015,133
SunGard Data Systems, Inc. company guaranty 10 1/4s, 2015   1,646,000   1,711,840
SunGard Data Systems, Inc. company guaranty 9 1/8s, 2013   5,128,000   5,281,840
Travelport LLC company guaranty 11 7/8s, 2016   495,000   454,163
Travelport LLC company guaranty 9 7/8s, 2014   1,605,000   1,544,813
Unisys Corp. sr. unsec. unsub. notes 8s, 2012   1,395,000   1,255,500
        42,217,667
 
Textiles (1.2%)        
Hanesbrands, Inc. company guaranty sr. unsec.        
notes FRN Ser. B, 8.204s, 2014   2,630,000   2,445,900
Levi Strauss & Co. sr. unsec. notes 8 7/8s, 2016   1,490,000   1,508,625
Levi Strauss & Co. sr. unsec. unsub. notes 9 3/4s, 2015   3,405,000   3,566,738
Oxford Industries, Inc. sr. notes 8 7/8s, 2011   1,740,000   1,687,800
        9,209,063
 
Tire & Rubber (0.1%)        
Goodyear Tire & Rubber Co. (The) sr. notes 9s, 2015   605,000   648,863
 
Utilities & Power (6.2%)        
AES Corp. (The) sr. unsec. unsub. notes 8s, 2017   670,000   672,513
AES Corp. (The) 144A sec. notes 8 3/4s, 2013   1,904,000   1,956,360
AES Corp. (The) 144A sr. notes 8s, 2020   520,000   510,900
Allegheny Energy Supply 144A sr. unsec. bond 8 1/4s, 2012   1,335,000   1,408,425
CMS Energy Corp. sr. notes 8 1/2s, 2011   490,000   517,746
CMS Energy Corp. sr. notes 7 3/4s, 2010   1,190,000   1,240,222
Colorado Interstate Gas Co. debs. 6.85s, 2037   1,430,000   1,353,288
Colorado Interstate Gas Co. sr. notes 5.95s, 2015   129,000   127,594
Dynegy Holdings, Inc. sr. unsec. notes 8 3/8s, 2016   555,000   557,775
Dynegy-Roseton Danskamme company guaranty Ser. B,        
7.67s, 2016   2,180,000   2,212,700
Edison Mission Energy sr. unsec. notes 7 3/4s, 2016   755,000   773,875
Edison Mission Energy sr. unsec. notes 7 1/2s, 2013   885,000   902,700
Edison Mission Energy sr. unsec. notes 7.2s, 2019   1,920,000   1,872,000
Edison Mission Energy sr. unsec. notes 7s, 2017   1,015,000   992,163
El Paso Corp. sr. notes Ser. MTN, 7.8s, 2031   705,000   709,406
El Paso Natural Gas Co. debs. 8 5/8s, 2022   765,000   848,136
Ferrellgas LP/Finance sr. notes 6 3/4s, 2014   2,495,000   2,382,725
Ipalco Enterprises, Inc. 144A sr. sec. notes 7 1/4s, 2016   230,000   230,000
Mirant Americas Generation, Inc. sr. unsec.        
notes 8.3s, 2011   1,440,000   1,497,600
Mirant North America, LLC company guaranty 7 3/8s, 2013   2,960,000   2,982,200
NRG Energy, Inc. company guaranty 7 3/8s, 2017   935,000   916,300
NRG Energy, Inc. sr. notes 7 3/8s, 2016   6,535,000   6,371,625
Orion Power Holdings, Inc. sr. unsec. notes 12s, 2010   1,445,000   1,585,888
PNM Resources, Inc. unsec. unsub. notes 9 1/4s, 2015   1,875,000   1,940,625
Sierra Pacific Power Co. general ref. mtge. 6 1/4s, 2012   485,000   494,883

41

CORPORATE BONDS AND NOTES (82.0%)* continued        
 
    Principal amount   Value
Utilities & Power continued        
Sierra Pacific Resources sr. unsec. notes 8 5/8s, 2014 $ 1,940,000 $ 2,029,432
Teco Finance, Inc. company guaranty sr. unsec.        
unsub. notes 7.2s, 2011   680,000   712,305
Teco Finance, Inc. company guaranty sr. unsec.        
unsub. notes 7s, 2012   1,165,000   1,213,057
Teco Finance, Inc. company guaranty sr. unsec.        
unsub. notes 6 3/4s, 2015   140,000   140,393
Tennessee Gas Pipeline Co. sr. unsec.        
unsub. debs. 7 1/2s, 2017   610,000   648,420
Tennessee Gas Pipeline Co. sr. unsec.        
unsub. debs. 7s, 2028   305,000   295,433
Transcontinental Gas Pipeline Corp. sr. unsec.        
debs. 7 1/4s, 2026   1,055,000   1,076,100
Utilicorp United, Inc. sr. unsec. notes 9.95s, 2011   68,000   69,948
Williams Cos., Inc. (The) notes 7 3/4s, 2031   1,225,000   1,304,625
Williams Cos., Inc. (The) sr. unsec. notes 7 5/8s, 2019   2,600,000   2,791,750
Williams Cos., Inc. (The) 144A notes 6 3/8s, 2010   700,000   717,500
Williams Partners LP/ Williams Partners        
Finance Corp. sr. unsec. notes 7 1/4s, 2017   705,000   720,863
        46,777,475
 
Total corporate bonds and notes (cost $647,985,451)     $ 615,847,604
 
 
SENIOR LOANS (9.8%)* (c)        
    Principal amount   Value
 
Automotive (0.3%)        
Allison Transmission bank term loan FRN Ser. B,        
5.532s, 2014 $ 1,493,750 $ 1,367,948
Dana Corp. bank term loan FRN 6 3/4s, 2015   1,222,688   1,154,294
        2,522,242
 
Basic Materials (0.9%)        
Domtar Corp. bank term loan FRN 3.779s, 2014 (Canada)   1,830,243   1,746,358
Georgia-Pacific, LLC bank term loan FRN Ser. B,        
4.685s, 2013   2,486,102   2,350,403
Graphic Packaging Corp. bank term loan FRN Ser. C,        
5.533s, 2014   395,000   380,780
Huntsman International, LLC bank term loan FRN        
Ser. B, 4.133s, 2012   1,171,524   1,133,450
Ineos Holdings, Ltd. bank term loan FRN Ser. B2,        
4.885s, 2014 (United Kingdom)   217,778   199,267
Ineos Holdings, Ltd. bank term loan FRN Ser. C2,        
5.385s, 2015 (United Kingdom)   217,778   199,267
NewPage Holding Corp. bank term loan FRN 6.313s, 2014   473,813   471,976
Rockwood Specialties Group, Inc. bank term loan FRN        
Ser. E, 4.399s, 2012   439,103   419,480
        6,900,981

42

SENIOR LOANS (9.8%)* (c) continued        
    Principal amount   Value
Broadcasting (0.2%)        
Univision Communications, Inc. bank term loan FRN        
Ser. B, 5.118s, 2014 $ 1,850,000 $ 1,558,856
Young Broadcasting, Inc. bank term loan FRN Ser. B,        
5.235s, 2012   79,027   70,729
        1,629,585
 
Cable Television (0.1%)        
Cablevision Systems Corp. bank term loan FRN 4.34s,        
2013   1,083,620   1,027,961
 
Capital Goods (0.6%)        
Hawker Beechcraft Acquisition Co., LLC bank term        
loan FRN 4.73s, 2014   27,013   25,287
Hawker Beechcraft Acquisition Co., LLC bank term        
loan FRN Ser. B, 4.696s, 2014   463,551   433,927
Sensata Technologies BV bank term loan FRN 4.662s,        
2013 (Netherlands)   1,306,675   1,201,596
Sequa Corp. bank term loan FRN 5.873s, 2014   847,875   806,011
Transdigm, Inc. bank term loan FRN 4.655s, 2013   225,000   217,500
Wesco Aircraft Hardware Corp. bank term loan FRN        
8.45s, 2014   1,275,000   1,243,125
Wesco Aircraft Hardware Corp. bank term loan FRN        
4.95s, 2013   389,000   380,734
        4,308,180
 
Communication Services (0.4%)        
Alltel Communications, Inc. bank term loan FRN        
Ser. B2, 5.648s, 2015   1,510,000   1,399,685
Alltel Communications, Inc. bank term loan FRN        
Ser. B3, 5.248s, 2015   1,255,000   1,163,315
Cricket Communications, Inc. bank term loan FRN        
Ser. B, 5.696s, 2013   31,919   31,303
        2,594,303
 
Consumer Cyclicals (1.4%)        
CCM Merger, Inc. bank term loan FRN Ser. B, 4.691s, 2012   656,625   617,228
GateHouse Media, Inc. bank term loan FRN Ser. B,        
4.65s, 2014   822,935   573,997
GateHouse Media, Inc. bank term loan FRN Ser. DD,        
4.714s, 2014   307,065   214,178
Golden Nugget, Inc. bank term loan FRN Ser. B,        
4.427s, 2014   238,636   217,756
Golden Nugget, Inc. bank term loan FRN Ser. DD,        
1 3/4s, 2014 (U)   136,364   124,432
Goodman Global Holdings, Inc. bank term loan FRN        
Ser. B, 7 1/2s, 2011   1,090,000   1,077,738
Landsource Communities/NWHL Investment bank term        
loan FRN 6 3/4s, 2013   1,444,101   1,020,155
Lear Corp bank term loan FRN 5.295s, 2013   2,163,328   2,048,851

43

SENIOR LOANS (9.8%)* (c) continued        
    Principal amount   Value
 
Consumer Cyclicals continued        
Standard-Pacific Corp. bank term loan FRN Ser. B,        
4.469s, 2013 $ 815,000 $ 652,000
Tribune Co. bank term loan FRN Ser. B, 5.542s, 2014   3,542,013   2,618,139
United Components, Inc. bank term loan FRN Ser. D,        
4.755s, 2012   194,222   185,482
Visteon Corp. bank term loan FRN Ser. B, 7.2s, 2013   1,560,000   1,337,266
        10,687,222
 
Consumer Staples (0.9%)        
Charter Communications Operating, LLC bank term loan        
FRN 8 1/2s, 2014   280,000   278,031
Charter Communications, Inc. bank term loan FRN        
4.9s, 2014   290,182   257,702
Citadel Communications bank term loan FRN Ser. B,        
4.175s, 2014   760,000   656,133
Mediacom Communications Corp. bank term loan FRN        
Ser. C, 4.235s, 2015   1,366,537   1,242,978
Pinnacle Foods Holding Corp. bank term loan FRN        
Ser. B, 5.473s, 2014   355,559   332,892
Rental Service Corp. bank term loan FRN 6.23s, 2013   2,010,000   1,745,349
Rite-Aid Corp. bank term loan FRN Ser. B, 4.227s, 2014   120,000   112,860
Six Flags Theme Parks bank term loan FRN 4.809s, 2015   2,519,113   2,256,404
        6,882,349
 
Energy (—%)        
Enterprise GP Holdings, LP bank term loan FRN        
4.923s, 2014   280,000   274,050
Western Refining, Inc. bank term loan FRN Ser. B,        
4.649s, 2014   60,000   53,100
        327,150
 
Financial (0.4%)        
General Growth Properties, Inc. bank term loan FRN        
Ser. A, 3.95s, 2010 (R)   125,000   113,359
Nuveen Investments, Inc. bank term loan FRN Ser. B,        
5.386s, 2014   460,000   430,330
Residential Capital, LLC bank term loan FRN 4.06s, 2008   2,895,000   2,743,013
        3,286,702
 
Gaming & Lottery (0.1%)        
Isle of Capri Casinos, Inc. bank term loan FRN        
4.446s, 2014   615,610   554,049
Isle of Capri Casinos, Inc. bank term loan FRN        
Ser. A, 4.446s, 2014   192,785   173,507
Isle of Capri Casinos, Inc. bank term loan FRN        
Ser. B, 4.446s, 2014   246,244   221,620
        949,176

44

SENIOR LOANS (9.8%)* (c) continued        
    Principal amount   Value
Health Care (1.6%)        
Bausch & Lomb, Inc. bank term loan FRN Ser. B,        
5.946s, 2015 $ 1,479,259 $ 1,449,057
Bausch & Lomb, Inc. bank term loan FRN Ser. DD,        
5.946s, 2015 (U)   370,741   363,172
Biomet, Inc. bank term loan FRN Ser. B, 5.696s, 2015   1,055,000   1,024,375
Community Health Systems, Inc. bank term loan FRN        
Ser. B, 4.835s, 2014   1,591,051   1,499,871
Community Health Systems, Inc. bank term loan FRN        
Ser. DD, 1/2s, 2014 (U)   83,236   78,466
Fenwal Controls of Japan, LTD. bank term loan FRN        
4.899s, 2014 (Japan)   2,162,010   1,867,436
Fenwal Controls of Japan, LTD. bank term loan FRN        
Ser. DD, 0 1/2s, 2014 (Japan) (U)   339,178   292,965
Health Management Associates, Inc. bank term loan        
FRN 4.446s, 2014   1,793,005   1,662,691
Healthsouth Corp. bank term loan FRN Ser. B, 5.09s,        
2013   976,218   926,645
IASIS Healthcare, LLC/IASIS Capital Corp. bank term        
loan FRN 8.163s, 2014   2,263,592   1,997,620
Mylan, Inc. bank term loan FRN Ser. B, 5.847s, 2014   708,225   695,654
        11,857,952
 
Homebuilding (0.1%)        
Realogy Corp. bank term loan FRN 5.32s, 2013 (‘R)   254,742   216,530
Realogy Corp. bank term loan FRN Ser. B, 5.59s, 2013 (‘R)   946,183   804,256
        1,020,786
 
Media (0.1%)        
Idearc, Inc. bank term loan FRN Ser. B, 4.687s, 2014   1,071,859   890,447
 
Oil & Gas (0.1%)        
Targa Resources, Inc. bank term loan FRN 4.651s, 2012   278,652   272,034
Targa Resources, Inc. bank term loan FRN 2.571s, 2012   156,348   152,635
        424,669
 
Retail (0.2%)        
Claire’s Stores, Inc. bank term loan FRN 5.413s, 2014   777,492   618,349
Michaels Stores, Inc. bank term loan FRN Ser. B,        
5.042s, 2013   782,060   679,610
        1,297,959
 
Technology (0.5%)        
Compucom Systems, Inc. bank term loan FRN 5.89s, 2014   970,125   863,411
First Data Corp. bank term loan FRN Ser. B1, 5.168s, 2014   1,220,375   1,131,205
First Data Corp. bank term loan FRN Ser. B3, 5.355s, 2014   920,375   853,763
Flextronics International, Ltd. bank term loan FRN        
Ser. B, 4.963s, 2014 (Singapore)   227,651   210,766
Flextronics International, Ltd. bank term loan FRN        
Ser. B, 4.947s, 2014 (Singapore)   792,224   733,467
        3,792,612

45

SENIOR LOANS (9.8%)* (c) continued        
 
    Principal amount   Value
Tire & Rubber (0.4%)        
Goodyear Tire & Rubber Co. (The) bank term loan FRN        
4.54s, 2010 $ 2,960,000 $ 2,765,380
 
Transportation (0.5%)        
Navistar Financial Corp. bank term loan FRN 5.754s, 2012   940,000   882,817
Navistar International Corp. bank term loan FRN        
6.234s, 2012   2,585,000   2,427,747
UAL Corp. bank term loan FRN Ser. B, 4.809s, 2014   67,694   51,719
        3,362,283
 
Utilities & Power (1.0%)        
Energy Future Holdings Corp. bank term loan FRN        
Ser. B2, 6.256s, 2014   4,482,600   4,218,230
Energy Future Holdings Corp. bank term loan FRN        
Ser. B3, 6.262s, 2014   3,293,450   3,095,020
        7,313,250
 
Total senior loans (cost $78,282,336)     $ 73,841,189
 
 
CONVERTIBLE BONDS AND NOTES (1.7%)*        
 
    Principal amount   Value
Acquicor Technology, Inc. 144A cv. notes 8s, 2011 $ 822,000 $ 567,180
Chiquita Brands International cv. sr. unsec.        
notes 4 1/4s, 2016   665,000   850,369
Countrywide Financial Corp. cv. unsec. sr. FRN        
company guaranty 0.758s, 2037   875,000   818,125
DRS Technologies, Inc. 144A cv. unsec. notes 2s, 2026   1,420,000   1,920,550
General Growth Properties, Inc.        
144A cv. sr. notes 3.98s, 2027   1,425,000   1,168,500
Jazz Technologies, Inc. cv. company guaranty 8s, 2011   20,000   13,800
Level 3 Communications, Inc. cv. sr. notes 3 1/2s, 2012   995,000   861,919
NII Holdings, Inc. cv. unsec. notes 3 1/8s, 2012   175,000   151,156
NII Holdings, Inc. 144A cv. sr. unsec. notes 3 1/8s, 2012   1,298,000   1,121,148
Pantry, Inc. (The) cv. sr. sub. notes 3s, 2012   2,155,000   1,500,419
Sinclair Broadcast Group, Inc. cv. sr. sub. notes stepped-coupon        
4 7/8s (2s, 1/15/11) 2018 ††   1,210,000   1,111,688
Transocean, Inc. cv. sr. unsec. notes Ser. C,        
1 1/2s, 2037   1,070,000   1,210,438
Trinity Industries, Inc. cv. sub. notes 3 7/8s, 2036   1,310,000   1,360,763
Total convertible bonds and notes (cost $12,112,926)     $ 12,656,055

46

ASSET-BACKED SECURITIES (0.4%)*        
    Principal amount   Value
Neon Capital, Ltd. 144A        
limited recourse sec. notes Ser. 95, 2.319s, 2013        
(Cayman Islands) (F) (g) $ 3,901,050 $ 1,162,474
limited recourse sec. notes Ser. 97, 1.105s, 2013        
(Cayman Islands) (F) (g)   6,684,836   1,792,358
Total asset-backed securities (cost $2,964,912)     $ 2,954,832
 
COLLATERALIZED MORTGAGE OBLIGATIONS (0.3%)*        
    Principal amount   Value
DLJ Commercial Mortgage Corp. 144A Ser. 98-CF2,        
Class B5, 5.95s, 2031 $ 1,581,791 $ 1,282,927
GE Capital Commercial Mortgage Corp. 144A Ser. 00-1,        
Class G, 6.131s, 2033   1,025,000   741,844
Mach One Commercial Mortgage Trust 144A        
Ser. 04-1A, Class J, 5.45s, 2040 (Canada)   1,000,000   350,000
Ser. 04-1A, Class K, 5.45s, 2040 (Canada)   365,000   109,500
Ser. 04-1A, Class L, 5.45s, 2040 (Canada)   165,000   66,000
Total collateralized mortgage obligations (cost $3,123,108)     $ 2,550,271
 
FOREIGN GOVERNMENT BONDS AND NOTES (0.1%)*        
    Principal amount   Value
Argentina (Republic of ) bonds FRB zero%, 2013 $ 2,000,000 $ 978,000
Argentina (Republic of ) sr. unsec. unsub. bonds FRB        
3.092s, 2012   165,625   142,467
Total foreign government bonds and notes (cost $1,176,352)     $ 1,120,467
 
SHORT-TERM INVESTMENTS (5.5%)*        
  Principal amount/shares   Value
Short-term investments held as collateral for loaned        
securities with yields ranging from 2.20% to 2.91%        
and due dates ranging from June 2, 2008 to July 25,        
2008 (d) $ 14,797,631 $ 14,775,935
Putnam Prime Money Market Fund (e)   26,734,232   26,734,232
Total short-term investments (cost $41,510,167)     $ 41,510,167
 
TOTAL INVESTMENTS        
Total investments (cost $787,155,252)     $ 750,480,585

47

Key to holding’s currency abbreviations

EUR            Euro

* Percentages indicated are based on net assets of $750,661,941.

† Non-income-producing security.

†† The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will begin accruing interest at this rate.

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

## Forward commitments, in part or in entirety (Note 1).

(c) Senior loans are exempt from registration under the Securities Act of 1933, as amended, but contain certain restrictions on resale and cannot be sold publicly. These loans pay interest at rates which adjust periodically. The interest rates shown for senior loans are the current interest rates at May 31, 2008. Senior loans are also subject to mandatory and/or optional prepayment which cannot be predicted. As a result, the remaining maturity may be substantially less than the stated maturity shown (Notes 1 and 6).

(d) See Note 1 to the financial statements.

(e) See Note 5 to the financial statements regarding investments in Putnam Prime Money Market Fund.

(F) Is valued at fair value following procedures approved by the Trustees. Securities may be classified as a Level 2 or Level 3 for FASB 157 disclosures based on the securities valuation inputs.

(g) The notes are secured by debt and equity securities and equity participation agreements held by Neon Capital, Ltd.

(R) Real Estate Investment Trust.

(S) Securities on loan, in part or in entirety, at May 31, 2008.

(U) These securities, in part or in entirety, represents unfunded loan commitments (Note 7).

At May 31, 2008, liquid assets totaling $17,536,814 have been designated as collateral for open forward commitments, swap contracts and forward contracts.

144A after the name of an issuer represents securities exempt from registration under Rule 144A under the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates at May 31, 2008.

The dates shown on debt obligations are the original maturity dates.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. While the adoption of SFAS 157 does not have a material effect on the fund’s net asset value, it does require additional disclosures about fair value measurements. The Standard establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of the fund’s investments. The three levels are defined as follows: Level 1 – Valuations based on quoted prices for identical securities in active markets.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to the fair value measurement.

The following is a summary of the inputs used to value the fund’s net assets as of May 31, 2008:

 
Valuation inputs Investments in securities Other financial instruments
Level 1 $26,734,232 $—
Level 2 720,785,288 2,572,203
Level 3 2,961,065 —
Total $750,480,585 $2,572,203

Other financial instruments include futures, written options, TBA sale commitments, swaps and forward contracts which are valued at the unrealized appreciation/(depreciation) on the instrument.

48

The following is a reconciliation of Level 3 assets as of May 31, 2008:

 
  Investment in securities Other financial instruments
Balance as of November 30, 2007 $3,366,136   $—  
Accrued discounts/premiums — —
Realized gain / loss — —
Change in net unrealized appreciation (depreciation) (405,071) —
Net purchases / sales — —
Net transfers in and/or out of Level 3 — —
Balance as of May 31, 2008 $2,961,065 $—

Other financial instruments include futures, written options, TBA sale commitments, swaps and forward contracts which are valued at the unrealized appreciation/ (depreciation) on the instrument.

FORWARD CURRENCY CONTRACTS TO BUY at 5/31/08 (Unaudited)    
    Aggregate Delivery Unrealized
  Value face value date appreciation
Canadian Dollar $605,936 $594,258 7/16/08 $11,678

FORWARD CURRENCY CONTRACTS TO SELL at 5/31/08 (Unaudited)    
    Aggregate Delivery Unrealized
  Value face value date depreciation
Euro $7,716,216 $7,555,088 6/18/08 $(161,128)

INTEREST RATE SWAP CONTRACTS OUTSTANDING at 5/31/08 (Unaudited)
 
    Payments Payments  
Swap counterparty / Termination made by received by Unrealized
Notional amount date fund per annum fund per annum appreciation
Lehman Brothers Special Financing, Inc.        
$141,110,000 9/14/09 3 month USD-LIBOR-    
    BBA 4.715% $3,316,183

CREDIT DEFAULT CONTRACTS OUTSTANDING at 5/31/08 (Unaudited)    
 
    Upfront     Fixed payments Unrealized
Swap counterparty /   premium Notional Termination received (paid) by appreciation/
Referenced debt* received (paid)** amount   date fund per annum (depreciation)
Bank of America, N.A.            
Abitibibowater Inc.,            
6 1/2%, 6/15/13 $ — $440,000 12/20/08 550 bp $(24,401)
Nalco, Co.            
7.75%,11/15/11   — 400,000 9/20/12 350 bp 8,503
Visteon Corp.,            
7%, 3/10/14   (129,330) 675,000 6/20/13 (500 bp) 26,368
Bear Stearns Credit Products, Inc.          
Claire’s Stores,            
9 5/8%, 6/1/15   — 255,000 6/20/12 230 bp (40,131)
Citibank, N.A.            
Abitibibowater Inc.,            
6 1/2%, 6/15/13   — 440,000 12/20/08 725 bp (18,814)

49

CREDIT DEFAULT CONTRACTS OUTSTANDING at 5/31/08 (Unaudited) continued  
  Upfront       Fixed payments Unrealized
Swap counterparty / premium   Notional Termination received (paid)   by appreciation/
Referenced debt* received (paid)**   amount date fund per annum (depreciation)
Citibank, N.A. continued            
Abitibibowater Inc.,            
6 1/2%, 6/15/13 — $ 440,000 12/20/08 800 bp $ (16,424)
Abitibibowater Inc.,            
6 1/2%, 6/15/13 —   440,000 12/20/08 825 bp (15,625)
Amkor Technologies,            
Inc., 7 3/4%, 5/15/13 —   915,000 6/20/13 450 bp (20,917)
Freescale            
Semiconductor, 8 7/8%,            
12/15/14 — 1,105,000 9/20/12 495 bp (79,883)
Lear Corp., term loan —   370,000 6/20/13 (225 bp) 9,578
Sanmina-Sci Corp.,            
8 1/8%, 3/1/16 —   320,000 6/20/13 585 bp (4,736)
Sanmina-Sci Corp.,            
8 1/8%, 3/1/16 —   255,000 3/20/09 275 bp 1,042
Wind Acquisition            
9 3/4%, 12/1/15 — EUR 153,000 3/20/13 (495 bp) (9,902)
Credit Suisse International            
Advanced Micro Devices,            
7 3/4%, 11/1/12 — $ 495,000 6/20/09 165 bp (25,569)
Dynegy Holdings Inc.,            
6 7/8%, 4/1/11 —   720,000 6/20/17 297 bp (59,509)
Echostar DBS Corp.,            
6 5/8%, 10/1/14 — 1,495,000 6/20/13 (225 bp) 17,940
Harrahs Operating Co.            
Inc., 5 5/8%, 6/1/15 —   790,000 3/20/09 600 bp 6,120
Deutsche Bank AG            
Nalco, Co. 7.75%,            
11/15/11 —   370,000 12/20/12 363 bp 8,558
Goldman Sachs International            
Any one of the            
underlying securities            
in the basket of BB            
CMBS securities — 1,485,000 (F) (a) 2.461% (274,947)
General Motors Corp.,            
7 1/8%, 7/15/13 —   365,000 9/20/08 620 bp 4,687
General Motors Corp.,            
7 1/8%, 7/15/13 — 1,725,000 9/20/08 620 bp 22,153
Wind Acquisition            
9 3/4%, 12/1/15 — EUR 340,000 12/20/10 (340 bp) (7,552)
JPMorgan Chase Bank, N.A.            
Sanmina-Sci Corp.,            
8 1/8%, 3/1/16 — $ 255,000 6/20/13 595 bp (2,857)
Smurfit-Stone Container            
Enterprises, 7 1/2%,            
6/1/13 —   115,000 3/20/13 685 bp 2,392
Lehman Brothers Special Financing, Inc.          
Community Health            
Systems, 8 7/8%, 7/15/15 —   960,000 12/20/12 360 bp (15,197)
Harrahs Operating Co.            
Inc., 5 5/8%, 6/1/15 —   550,000 3/20/09 610 bp 4,796

50

CREDIT DEFAULT CONTRACTS OUTSTANDING at 5/31/08 (Unaudited) continued  
  Upfront       Fixed payments Unrealized
Swap counterparty / premium   Notional Termination received (paid)  by appreciation/
Referenced debt* received (paid)**   amount date fund per annum (depreciation)
Lehman Brothers Special Financing, Inc. continued          
Jefferson Smurfit            
Corp., 7 1/2%, 6/1/13 — $ 185,000 3/20/13 645 bp $ 1,271
Sungard Data Systems,            
Inc., 9 1/8%, 8/15/13 —   930,000 9/20/12 395 bp 10,081
Wind Acquisition            
9 3/4%, 12/1/15 — EUR 155,000 12/20/10 (357 bp) (4,384)
Merrill Lynch Capital Services, Inc.          
General Motors Corp.,            
7 1/8%, 7/15/13 — $1,205,000 9/20/08 500 bp 7,988
Merrill Lynch International            
Dynegy Holdings Inc.,            
6 7/8%, 4/1/11 —   720,000 6/20/17 295 bp (61,681)
Morgan Stanley Capital Services, Inc.          
Advanced Micro Devices,            
7 3/4%, 11/1/12 —   50,000 6/20/09 190 bp (2,102)
Aramark Services, Inc.,            
8.5%, 2/1/15 —   780,000 12/20/12 355 bp (5,609)
Dynegy Holdings Inc.,            
6 7/8%, 4/1/11 —   720,000 6/20/12 225 bp (37,136)
Jefferson Smurfit Corp,            
7.5%, 6/1/13 —   660,000 9/20/12 445 bp (36,434)
Nalco, Co. 7.75%,            
11/15/11 —   405,000 9/20/12 330 bp 5,448
Nalco, Co. 7.75%,            
11/15/11 —   530,000 3/20/13 460 bp 32,355
Total           $(594,530)

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

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

(a) Terminating on the date on which the notional amount is reduced to zero or the date on which the assets securing the reference entity are liquidated.

(F) Is valued at fair value following procedures approved by the Trustees. Securities may be classified as a Level 2 or Level 3 for FASB 157 disclosures based on securities valuation inputs.

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

51

Statement of assets and liabilities 5/31/08 (Unaudited)

ASSETS    
Investment in securities, at value, including $14,467,039 of securities on loan (Note 1):    
Unaffiliated issuers (identified cost $760,421,020) $ 723,746,353
Affiliated issuers (identified cost $26,734,232) (Note 5)   26,734,232
Cash   12,997,181
Foreign currency (cost $683,569) (Note 1)   676,102
Interest and other receivables   13,914,590
Receivable for shares of the fund sold   429,940
Receivable for securities sold   5,892,002
Receivable for sales of delayed delivery securities (Notes 1, 6 and 7)   848,750
Receivable from Manager (Note 2)   33,199
Unrealized appreciation on swap contracts (Note 1)   3,485,463
Premiums paid on swap contracts (Note 1)   129,330
Receivable for open forward currency contracts (Note 1)   21,642
Total assets   788,908,784
 
LIABILITIES    
Payable for securities purchased   16,963,147
Payable for purchases of delayed delivery securities (Notes 1, 6 and 7)   1,460,214
Payable for shares of the fund repurchased   2,455,361
Payable for compensation of Manager (Notes 2 and 5)   1,019,794
Payable for investor servicing fees (Note 2)   57,047
Payable for Trustee compensation and expenses (Note 2)   225,953
Payable for administrative services (Note 2)   1,712
Payable for distribution fees (Note 2)   271,185
Payable for open forward currency contracts (Note 1)   171,092
Unrealized depreciation on swap contracts (Note 1)   763,810
Collateral on securities loaned, at value (Note 1)   14,775,935
Other accrued expenses   81,593
Total liabilities   38,246,843
Net assets   $750,661,941

(Continued on next page)

52

Statement of assets and liabilities (Continued)

REPRESENTED BY  
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4) $ 1,788,405,613
Undistributed net investment income (Note 1) 5,389,387
Accumulated net realized loss on investments and foreign currency transactions (Note 1) (1,009,031,424)
Net unrealized depreciation of investments and assets and liabilities in foreign currencies (34,101,635)
Total — Representing net assets applicable to capital shares outstanding $ 750,661,941
 
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE  
Net asset value and redemption price per class A share  
($445,361,286 divided by 75,455,354 shares) $ 5.90
Offering price per class A share  
(100/96.00 of $5.90)* $ 6.15
Net asset value and offering price per class B share  
($10,083,036 divided by 1,733,053 shares)** $5.82
Net asset value and offering price per class C share  
($1,571,526 divided by 270,637 shares)** $5.81
Net asset value and redemption price per class M share  
($248,826,943 divided by 42,117,969 shares) $5.91
Offering price per class M share  
(100/96.75 of $5.91)*** $6.11
Net asset value, offering price and redemption price per class R share  
($46,735 divided by 7,905 shares) $5.91
Net asset value, offering price and redemption price per class Y share  
($44,772,415 divided by 7,404,873 shares) $6.05

* On single retail sales of less than $100,000. On sales of $100,000 or more the offering price is reduced.

** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

*** On single retail sales of less than $50,000. On sales of $50,000 or more the offering price is reduced.

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

53

Statement of operations Six months ended 5/31/08 (Unaudited)

INVESTMENT INCOME  
Interest (net of foreign tax of $2,658) (including interest income of $604,014  
from investments in affiliated issuers) (Note 5) $ 28,258,077
Securities lending 64,971
Total investment income 28,323,048
 
EXPENSES  
Compensation of Manager (Note 2) 2,263,148
Investor servicing fees (Note 2) 351,978
Custodian fees (Note 2) 11,085
Trustee compensation and expenses (Note 2) 21,503
Administrative services (Note 2) 16,987
Distribution fees — Class A (Note 2) 450,653
Distribution fees — Class B (Note 2) 52,586
Distribution fees — Class C (Note 2) 3,989
Distribution fees — Class M (Note 2) 642,293
Distribution fees — Class R (Note 2) 47
Other 290,278
Non-recurring costs (Notes 2 and 8) 921
Costs assumed by Manager (Notes 2 and 8) (921)
Fees waived and reimbursed by Manager (Notes 2 and 5) (121,284)
Total expenses 3,983,263
Expense reduction (Note 2) (80,166)
Net expenses 3,903,097
Net investment income 24,419,951
Net realized loss on investments (Notes 1 and 3) (7,150,571)
Net realized loss on swap contracts (Note 1) (221,416)
Net realized loss on foreign currency transactions (Note 1) (640,998)
Net unrealized appreciation of assets and liabilities  
in foreign currencies during the period 246,952
Net unrealized depreciation of investments and  
swap contracts during the period (6,614,954)
Net loss on investments (14,380,987)
Net increase in net assets resulting from operations $ 10,038,964

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

54

Statement of changes in net assets

INCREASE (DECREASE) IN NET ASSETS    
  Six months ended Year ended
  5/31/08* 11/30/07
Operations:    
Net investment income $ 24,419,951 $ 52,898,765
Net realized gain (loss) on investments and    
foreign currency transactions (8,012,985) 36,748,123
Net unrealized depreciation of investments and assets and    
liabilities in foreign currencies (6,368,002) (55,824,200)
Net increase in net assets resulting from operations 10,038,964 33,822,688
Distributions to shareholders (Note 1):    
From ordinary income    
Net investment income    
Class A (14,667,983) (29,750,825)
Class B (397,759) (909,127)
Class C (31,506) (10,650)
Class M (10,364,480) (22,018,330)
Class R (730) (47)
Class Y (1,770,321) (1,415,231)
Redemption fees (Note 1) 4,503 26,436
Increase (decrease) from capital share transactions (Note 4) 55,671,327 (77,684,006)
Total increase (decrease) in net assets 38,482,015 (97,939,092)
 
NET ASSETS    
Beginning of period 712,179,926 810,119,018
End of period (including undistributed net investment    
income of $5,389,387 and $8,202,215, respectively) $ 750,661,941 $ 712,179,926

* Unaudited

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

55

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

INVESTMENT OPERATIONS:     LESS DISTRIBUTIONS:     RATIOS AND SUPPLEMENTAL DATA:
      Net           Total     Ratio of net  
  Net asset Net realized and Total From     Net asset return Net Ratio of investment  
  value, investment unrealized from net     value, at net assets, expenses to income (loss) Portfolio
  beginning income gain (loss) on investment investment Total Redemption end asset end of period average net to average turnover
Period ended of period (loss) (a) investments operations income distributions fees of period value(%)(b) (in thousands) assets (%)(c)  net assets (%) (%)
CLASS A                          
May 31, 2008** $6.05 .22(d) (.13) .09 (.24) (.24) —(f) $5.90 1.63* $445,361 .55*(d) 3.68*(d) 29.12*
November 30, 2007 6.22 .44(d) (.16) .28 (.45) (.45) —(f) 6.05 4.50 373,890 1.08(d) 7.04(d) 47.50
November 30, 2006 5.97 .45(d,e) .22 .67 (.42) (.42) —(f) 6.22 11.71 433,782 1.04(d,e) 7.41(d,e) 45.62
November 30, 2005 6.16 .43(d) (.21) .22 (.41) (.41) —(f) 5.97 3.67 440,780 1.04(d) 7.07(d) 33.37
November 30, 2004 5.88 .43(d) .29 .72 (.44) (.44) —(f) 6.16 12.72 484,372 1.07(d) 7.22(d) 53.33
November 30, 2003 5.17 .48 .73 1.21 (.50) (.50) — 5.88 24.65 507,140 1.03 8.61 78.78
 
CLASS B                          
May 31, 2008** $5.96 .19(d) (.11) .08 (.22) (.22) —(f) $5.82 1.42* $10,083 .92*(d) 3.32*(d) 29.12*
November 30, 2007 6.14 .39(d) (.17) .22 (.40) (.40) —(f) 5.96      3.58 11,407 1.83(d) 6.29(d) 47.50
November 30, 2006 5.89 .39(d,e) .23 .62 (.37) (.37) —(f) 6.14 10.98 16,530 1.79(d,e) 6.69(d,e) 45.62
November 30, 2005 6.08 .38(d) (.21) .17 (.36) (.36) —(f) 5.89 2.91 46,602 1.79(d) 6.30(d) 33.37
November 30, 2004 5.81 .38(d) .28 .66 (.39) (.39) —(f) 6.08 11.84 123,263 1.82(d) 6.50(d) 53.33
November 30, 2003 5.12 .43 .72 1.15 (.46) (.46) — 5.81 23.56 199,990 1.78 7.94 78.78
 
CLASS C                          
May 31, 2008** $5.95 .19(d) (.11) .08 (.22) (.22) —(f) $5.81 1.46* $1,572 .92*(d) 3.24*(d) 29.12*
November 30, 2007† 6.27 .26(d) (.33) (.07) (.25) (.25) —(f) 5.95 (1.11)* 776 1.23*(d) 4.29*(d) 47.50
 
CLASS M                          
May 31, 2008** $6.05 .21(d) (.11) .10 (.24) (.24) —(f) $5.91 1.70* $248,827 .67*(d) 3.56*(d) 29.12*
November 30, 2007 6.23 .42(d) (.17) .25 (.43) (.43) —(f) 6.05 4.11 275,959 1.33(d) 6.79(d) 47.50
November 30, 2006 5.98 .43(d,e) .23 .66 (.41) (.41) —(f) 6.23 11.47 349,881 1.29(d,e) 7.17(d,e) 45.62
November 30, 2005 6.17 .41(d) (.20) .21 (.40) (.40) —(f) 5.98 3.46 430,521 1.29(d) 6.82(d) 33.37
November 30, 2004 5.89 .42(d) .29 .71 (.43) (.43) —(f) 6.17 12.47 573,455 1.32(d) 6.98(d) 53.33
November 30, 2003 5.18 .47 .73 1.20 (.49) (.49) — 5.89 24.32 638,046 1.28 8.34 78.78
 
CLASS R                          
May 31, 2008** $6.05 .20(d) (.10) .10 (.24) (.24) —(f) $5.91 1.71* $47 .67*(d) 3.34*(d) 29.12*
November 30, 2007† 6.35 .29(d) (.32) (.03) (.27) (.27) —(f) 6.05 (.57)* 1 .89*(d) 4.62*(d) 47.50
 
CLASS Y                          
May 31, 2008** $6.19 .23(d) (.12) .11 (.25) (.25) —(f) $6.05 1.86* $44,772 .42*(d) 3.83*(d) 29.12*
November 30, 2007 6.35 .47(d) (.17) .30 (.46) (.46) —(f) 6.19 4.78 50,146 .83(d) 7.27(d) 47.50
November 30, 2006 6.08 .47(d,e) .23 .70 (.43) (.43) —(f) 6.35 12.05 9,925 .79(d,e) 7.63(d,e) 45.62
November 30, 2005 6.27 .45(d) (.22) .23 (.42) (.42) —(f) 6.08 3.80 20,411 .79(d) 7.31(d) 33.37
November 30, 2004 5.97 .45(d) .30 .75 (.45) (.45) —(f) 6.27 13.09 26,684 .82(d) 7.46(d) 53.33
November 30, 2003 5.23 .50 .76 1.26 (.52) (.52) — 5.97 25.21 24,253 .78 8.83 78.78

See notes to financial highlights at the end of this section.

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

56 57

Financial highlights (Continued)

* Not annualized.

** Unaudited.

† For the period March 30, 2007 (commencement of operations) to November 30, 2007.

(a) Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding during the period.

(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.

(c) Includes amounts paid through expense offset arrangements (Note 2).

(d) Reflects an involuntary contractual expense limitation and/or waivers of certain fund expenses in connection with investments in Putnam Prime Money Market Fund in effect during the period. As a result of such limitation and/or waivers, the expenses of each class reflect a reduction of the following amounts (Notes 2 and 5):

  Percentage
  of average
  net assets
May 31, 2008 0.02%
November 30, 2007 <0.01
November 30, 2006 <0.01
November 30, 2005 <0.01
November 30, 2004 <0.01

(e) Reflects a non-recurring reimbursement from Putnam Investments relating to the calculation of certain amounts paid by the fund to Putnam in previous years for transfer agent services, which amounted to less than $0.01 per share and 0.01% of average net assets for the period ended November 30, 2006.

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

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

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Notes to financial statements 5/31/08 (Unaudited)

Note 1: Significant accounting policies

Putnam High Yield Advantage Fund (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 seeks high current income primarily through a diversified portfolio of higher yielding, lower rated bonds that may have a higher rate of default. Capital growth is a secondary objective when consistent with the objective of high current income. The fund may invest a significant portion of their assets in securitized debt instruments, including mortgage-backed and asset-backed investments. The yields and values of these investments are sensitive to changes in interest rates, the rate of principal payments on the underlying assets and the market’s perception of the issuers. The market for these investments may be volatile and limited, which may make them difficult to buy or sell.

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 4.00% and 3.25%, respectively, and generally do not pay a contingent deferred sales charge. 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 six years of purchase. 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 at net asset value. The expenses for class A, class B, class C, class M and class R shares may differ based on the distribution fee of each class, 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 generally only available to corporate and institutional clients and clients in other approved programs.

A 1.00% redemption fee may apply on any shares that are redeemed (either by selling or exchanging into another fund) within 90 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. If the fund were liquidated, shares of each class would receive their pro-rata share of the net assets of the fund. In addition, the Trustees declare separate dividends on each class of shares.

In the normal course of business, the fund enters into contracts that may include agreements to indemnify another party under given circumstances. The fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be, but have not yet been, made against the fund. However, the fund’s management team expects the risk of material loss to be remote.

The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

A) Security valuation Market quotations are not considered to be readily available for certain debt obligations; such investments are valued on the basis of valuations furnished by an independent

59

pricing service approved by the Trustees or dealers selected by Putnam Investment Management, LLC (“Putnam Management”), the fund’s manager, a wholly-owned subsidiary of Putnam, LLC. Such services or dealers determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships, generally recognized by institutional traders, between securities. Securities quoted in foreign currencies, if any, are translated into U.S. dollars at the current exchange rate. To the extent a pricing service or dealer is unable to value a security or provides a valuation which Putnam Management does not believe accurately reflects the security's fair value, the security will be valued at fair value by Putnam Management. Certain investments, including certain restricted securities and derivatives, are also valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. Certain securities may be valued on the basis of a price provided by a single source. The fair value of securities is generally determined as the amount that the fund could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. By its nature, a fair value price is a good faith estimate of the value of a security at a given point in time and does not reflect an actual market price, which may be different by a material amount.

B) Joint trading account Pursuant to an exemptive order from the Securities and Exchange Commission (the “SEC”), the fund may transfer uninvested cash balances, including cash collateral received under security lending arrangements, into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Management, the fund’s manager, a wholly-owned subsidiary of Putnam, LLC. These balances may be invested in issues of short-term investments having maturities of up to 397 days for collateral received under security lending arrangements and up to 90 days for other cash investments.

C) 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 (the date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. All premiums/discounts are amortized/accreted on a yield-to-maturity basis. Securities purchased or sold on a forward commitment or delayed delivery basis may be settled a month or more after the trade date; interest income is accrued based on the terms of the securities. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. The fund earned certain fees in connection with its senior loan purchasing activities. These fees are treated as market discount and are recorded as income in the Statement of operations.

E) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, and other assets and liabilities is recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when earned or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on

60

investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net realized exchange gains or losses on closed forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the fund’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments.

F) Forward currency contracts The fund may buy and sell forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date. These contracts are used to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short term investments), or for other investment purposes. The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is marked to market daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. Risks may exceed amounts recognized on the Statement of assets and liabilities. Forward currency contracts outstanding at period end, if any, are listed after the fund’s portfolio.

G) Interest rate swap contracts The fund may enter into interest rate swap contracts, which are arrangements between two parties to exchange cash flows based on a notional principal amount, to manage the fund’s exposure to interest rates. Interest rate swap contracts are marked to market daily based upon quotations from an independent pricing service or market makers and the change, if any, is recorded as an unrealized gain or loss. Payments received or made are recorded as a realized gains or loss. Certain interest rate swap contracts may include extended effective dates. Income related to these swap contracts is accrued based on the terms of the contract. The fund could be exposed to credit or market risk due to unfavorable changes in the fluctuation of interest rates or if the counterparty defaults on its obligation to perform. Risk of loss may exceed amounts recognized on the Statement of assets and liabilities. Interest rate swap contracts outstanding at period end, if any, are listed after the fund’s portfolio.

H) Credit default contracts The fund may enter into credit default contracts where one party, the protection buyer, makes an upfront or periodic payment to a counterparty, the protection seller, in exchange for the right to receive a contingent payment. The maximum amount of the payment may equal the notional amount, at par, of the underlying index or security as a result of a related credit event. Payments are made upon a credit default event of the disclosed primary referenced obligation or all other equally ranked obligations of the reference entity. An upfront payment received by the fund, as the protection seller, is recorded as a liability on the fund’s books. An

61

upfront payment made by the fund, as the protection buyer, is recorded as an asset on the fund’s books. Periodic payments received or paid by the fund are recorded as realized gains or losses. The credit default contracts are marked to market daily based upon quotations from an independent pricing service or market makers and the change, if any, is recorded as an unrealized gain or loss. Payments received or made as a result of a credit event or termination of the contract are recognized, net of a proportional amount of the upfront payment, as realized gains or losses. In addition to bearing the risk that the credit event will occur, the fund could be exposed to market risk due to unfavorable changes in interest rates or in the price of the underlying security or index, the possibility that the fund may be unable to close out its position at the same time or at the same price as if it had purchased comparable publicly traded securities or that the counterparty may default on its obligation to perform. Risks of loss may exceed amounts recognized on the Statement of assets and liabilities. Credit default contracts outstanding at period end, if any, are listed after the fund’s portfolio.

I) Securities lending The fund may lend securities, through its agents, to qualified borrowers in order to earn additional income. The loans are collateralized by cash and/or securities in an amount at least equal to the market value of the securities loaned. The market value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk of borrower default will be borne by the fund’s agents; the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the Statement of operations. At May 31, 2008, the value of securities loaned amounted to $14,467,039. The fund received cash collateral of $14,775,935 which is pooled with collateral of other Putnam funds into 73 issues of short-term investments.

J) 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, as amended (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. 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 November 30, 2007, the fund had a capital loss carryover of $1,001,007,717 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
$ 217,396,296 November 30, 2008
265,227,969 November 30, 2009
309,407,794 November 30, 2010
104,325,628 November 30, 2011
95,929,758 November 30, 2012
8,720,272 November 30, 2014

The aggregate identified cost on a tax basis is $787,165,974, resulting in gross unrealized appreciation and depreciation of $8,516,946 and $45,202,335, respectively, or net unrealized depreciation of $36,685,389.

K) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Dividend sources are estimated at the time of declaration. Actual results may vary. Any non-taxable return of capital cannot be determined until final tax calculations are completed after the end of the fund’s fiscal year. Reclassifications are made to the fund’s

capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations.

Note 2: Management fee, administrative services and other transactions

The fund pays Putnam Management 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: 0.70% of the first $500 million of average net assets, 0.60% of the next $500 million, 0.55% of the next $500 million, 0.50% of the next $5 billion, 0.475% of the next $5 billion, 0.455% of then next $5 billion, 0.44% of the next $5 billion, and 0.43% thereafter.

Putnam Management has agreed to waive fees and reimburse expenses of the fund through June 30, 2009 to the extent necessary to ensure that the fund’s expenses do not exceed the simple average of the expenses of all 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 May 31, 2008, Putnam Management waived $101,041 of its management fee from the fund.

Putnam Investments Limited ("PIL"), an affiliate of Putnam Management, is authorized by the Trustees to manage a separate portion of the assets of the fund as determined by Putnam Management from time to time. Putnam Management pays a quarterly sub-management fee to PIL for its services at an annual rate of 0.40% of the average net assets of the portion of the fund managed by PIL.

For the six months ended May 31, 2008, Putnam Management has assumed $921 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 8).

The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees.

Custodial services for the fund’s assets were provided by Putnam Fiduciary Trust Company (“PFTC”), an affiliate of Putnam Management, and by State Street Bank and Trust Company (“State Street”). Custody fees are based on the fund’s asset level, the number of its security holdings, transaction volumes and with respect to PFTC, certain fees related to the transition of assets to State Street. Putnam Investor Services, a division of PFTC, provided investor servicing agent functions to the fund. Putnam Investor Services received fees for investor servicing, subject to certain limitations, based on the number of shareholder accounts in the fund and the level of defined contribution plan assets in the fund. During the period ended May 31, 2008, the fund incurred $336,861 for custody and investor servicing agent functions provided by PFTC.

The fund has entered into expense offset arrangements with PFTC and State Street whereby PFTC's and State Street’s fees are reduced by credits allowed on cash balances. For the six months ended May 31, 2008, the fund's expenses were reduced by $80,166 under the expense offset arrangements.

Each independent Trustee of the fund receives an annual Trustee fee, of which $416, as a quarterly retainer, has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings and industry seminars and for certain compliance-related matters. Trustees also are reimbursed for expenses they incur relating to their services as Trustees.

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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 and were first elected prior to 2004. Benefits under the Pension Plan are equal to 50% of the Trustee's average annual attendance and retainer fees for the three years ended December 31, 2005. The retirement benefit is payable during a Trustee’s lifetime, beginning the year following retirement, for the number of years of service through December 31, 2006. Pension expense for the fund is included in Trustee compensation and expenses in the Statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the Statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003.

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 Limited Partnership, 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 Limited Partnership 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 May 31, 2008, Putnam Retail Management Limited Partnership, acting as underwriter, received net commissions of $6,342 and $175 from the sale of class A and class M shares, respectively, and received $4,156 and $7 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 May 31, 2008, Putnam Retail Management Limited Partnership, acting as underwriter, received no monies on class A and class M redemptions, respectively.

Note 3: Purchases and sales of securities

During the six months ended May 31, 2008, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $243,850,785 and $184,484,512, respectively. There were no purchases or sales of U.S. government securities.

Note 4: Capital shares

At May 31, 2008, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows:

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CLASS A Shares Amount
 
Six months ended 5/31/08:  
 
Shares sold 19,383,730 $ 114,615,020
Shares issued    
in connection    
with reinvestment    
of distributions 1,730,329 10,107,029
  21,114,059 124,722,049
Shares    
repurchased (7,505,653) (43,952,629)
Net increase 13,608,406 $ 80,769,420
   
Year ended 11/30/07:  
 
Shares sold 6,657,394 $ 41,691,671
Shares issued    
in connection    
with reinvestment    
of distributions 3,264,887 20,282,418
  9,922,281 61,974,089
Shares    
repurchased (17,826,794) (111,094,320)
Net decrease (7,904,513) $ (49,120,231)
 
CLASS B Shares Amount
 
Six months ended 5/31/08:  
 
Shares sold 242,197 $ 1,396,434
Shares issued    
in connection    
with reinvestment    
of distributions 41,668 240,000
  283,865 1,636,434
Shares    
repurchased (464,549) (2,677,646)
Net decrease (180,684) $(1,041,212)
 
Year ended 11/30/07:  
 
Shares sold 623,777 $ 3,860,080
Shares issued    
in connection    
with reinvestment    
of distributions 87,650 537,459
  711,427 4,397,539
Shares    
repurchased (1,491,696) (9,176,467)
Net decrease (780,269) $(4,778,928)

CLASS C Shares Amount
 
Six months ended 5/31/08:  
 
Shares sold 229,696 $ 1,311,042
Shares issued    
in connection    
with reinvestment    
of distributions 4,713 27,298
  234,409 1,338,340
Shares    
repurchased (94,162) (546,944)
Net increase 140,247 $ 791,396
 
For the period 3/30/07  
(commencement of operations) to 11/30/07:  
 
Shares sold 129,629 $ 788,774
Shares issued    
in connection    
with reinvestment    
of distributions 1,572 9,443
  131,201 798,217
Shares    
repurchased (811) (4,921)
Net increase 130,390 793,296
 
 
CLASS M Shares Amount
  
Six months ended 5/31/08:  
 
Shares sold 200,663 $ 1,189,288
Shares issued    
in connection    
with reinvestment    
of distributions 31,670 185,154
  232,333 1,374,442
Shares    
repurchased (3,714,604) (21,830,719)
 
Net decrease (3,482,271) $ (20,456,277)
 
Year ended 11/30/07:  
 
Shares sold 157,121 982,853
Shares issued    
in connection    
with reinvestment    
of distributions 60,425 375,908
  217,546 1,358,761
Shares    
repurchased (10,798,558) (67,709,447)
Net decrease (10,581,012) $ (66,350,686)

65

CLASS R Shares Amount
 
Six months ended 5/31/08:  
 
Shares sold 8,118 $ 47,571
Shares issued    
in connection    
with reinvestment    
of distributions 126 730
  8,244 48,301
Shares    
repurchased (581) (3,334)
Net increase 7,663 $ 44,967
 
For the period 3/30/07    
(commencement of operations) to 11/30/07:
 
Shares sold 234 $ 1,477
Shares issued    
in connection    
with reinvestment    
of distributions 8 42
  242 1,519
Shares    
repurchased — —
Net increase 242 $ 1,519
 
CLASS Y Shares Amount
 
Six months ended 5/31/08:  
 
Shares sold 3,039,367 $ 18,126,549
Shares issued    
in connection    
with reinvestment    
of distributions 295,477 1,765,526
  3,334,844 19,892,075
Shares    
repurchased (4,037,231) (24,329,042)
Net decrease (702,387) $ (4,436,967)
 
Year ended 11/30/07:    
 
Shares sold 7,462,360 $ 47,563,901
Shares issued    
in connection    
with reinvestment    
of distributions 223,019 1,406,702
  7,685,379 48,970,603
Shares    
repurchased (1,141,109) (7,199,579)
Net increase 6,544,270 $ 41,771,024

At May 31, 2008, Putnam, LLC owned 173 and 171 class C and class R shares, respectively (0.06% and 2.2% of class C and class R shares outstanding), valued at $1,003 and $1,011, respectively.

Note 5: Investment in Putnam Prime Money Market Fund

The fund invests in Putnam Prime Money Market Fund, an open-end management investment company managed by Putnam Management. Investments in Putnam Prime Money Market Fund are valued at its closing net asset value each business day. Management fees paid by the fund are reduced by an amount equal to the management fees paid by Putnam Prime Money Market Fund with respect to assets invested by the fund in Putnam Prime Money Market Fund. For the period ended May 31, 2008, management fees paid were reduced by $20,243 relating to the fund's investment in Putnam Prime Money Market Fund. Income distributions earned by the fund are recorded as income in the Statement of operations and totaled $604,014 for the period ended May 31, 2008. During the period ended May 31, 2008, cost of purchases and proceeds of sales of investments in Putnam Prime Money Market Fund aggregated $88,089,098 and $101,335,365, respectively.

Note 6: Senior loan commitments

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

66

risk that the borrower under the loan may default on its obligations.

Note 7: Unfunded loan commitments

As of May 31, 2008, the fund had unfunded loan commitments of $744,149, which could be extended at the option of the borrower, pursuant to the following loan agreements with the following borrowers:

Borrower Unfunded Commitments
Bausch & Lomb, Inc. $185,371
Community Health  
Systems, Inc. 83,236
Fenwal Controls of Japan,  
LTD. (Japan) 339,178
Golden Nugget, Inc. 136,364

Note 8: Regulatory matters and litigation

In late 2003 and 2004, Putnam Management settled charges brought by the SEC and the Massachusetts Securities Division in connection with excessive short-term trading in Putnam funds. Payments from Putnam Management will be distributed to certain open-end Putnam funds and their shareholders. These allegations and related matters have served as the general basis for certain lawsuits, including purported class action lawsuits against Putnam Management and, in a limited number of cases, some Putnam funds. Putnam Management believes that these lawsuits will have no material adverse effect on the funds or on Putnam Management’s ability to provide investment management services. In addition, Putnam Management has agreed to bear any costs incurred by the Putnam funds as a result of these matters.

Note 9: New accounting pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the “Interpretation”). The Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken by a filer in the filer’s tax return. Upon adoption, the Interpretation did not have a material effect on the fund's financial statements. However, the conclusions regarding the Interpretation may be subject to review and adjustment at a later date based on factors including, but not limited to, further implementation guidance expected from the FASB, and on-going analysis of tax laws, regulations and interpretations thereof.

In March 2008, Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”) — an amendment of FASB Statement No. 133 (“SFAS 133”), was issued and is effective for fiscal years beginning after November 15, 2008. SFAS 161 requires enhanced disclosures about how and why an entity uses derivative instruments and how derivative instruments affect an entity's financial position. Putnam Management is currently evaluating the impact the adoption of SFAS 161 will have on the fund’s financial statement disclosures.

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Putnam puts your interests first

Putnam has introduced a number of voluntary initiatives designed to reduce fund expenses, provide investors with more useful information, and help safeguard the interests of all Putnam investors. Visit the Individual Investors section at www.putnam.com for details.

Cost-cutting initiatives

Ongoing expenses will be limited Through calendar 2008, total ongoing expenses, including management fees for all funds, will be maintained at or below the average of each fund’s industry peers in its Lipper load-fund universe. For more information, please see the Statement of Additional information.

Lower class B purchase limit To help ensure that investors are in the most cost-effective share class, the maximum amount that can be invested in class B shares has been reduced to $100,000. (Larger trades or accumulated amounts will be refused.)

Improved disclosure

Putnam fund prospectuses and shareholder reports have been revised to disclose additional information that will help shareholders compare funds and weigh their costs and risks along with their potential benefits. Shareholders will find easy-to-understand information about fund expense ratios, portfolio manager compensation, risk comparisons, turnover comparisons, brokerage commissions, and employee and trustee ownership of Putnam funds. Disclosure of breakpoint discounts has also been enhanced to alert investors to potential cost savings.

Protecting investors’ interests

Short-term trading fee introduced To discourage short-term trading, which can interfere with a fund’s long-term strategy, a 1% short-term trading fee may be imposed on any Putnam fund shares (other than money market funds) redeemed or exchanged within seven calendar days of purchase (for certain funds, this fee applies for 90 days).

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Fund information

Founded over 70 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We manage nearly 100 mutual funds in growth, value, blend, fixed income, and international.

Investment Manager Kenneth R. Leibler James P. Pappas
Putnam Investment Robert E. Patterson Vice President
Management, LLC George Putnam, III   
One Post Office Square Richard B. Worley Francis J. McNamara, III
Boston, MA 02109   Vice President and
   Officers Chief Legal Officer
Investment Sub-Manager Charles E. Haldeman, Jr.   
Putnam Investments Limited President Robert R. Leveille
57–59 St James’s Street   Vice President and  
London, England SW1A 1LD Charles E. Porter Chief Compliance Officer
  Executive Vice President,   
Marketing Services Principal Executive Officer, Mark C. Trenchard
Putnam Retail Management Associate Treasurer and Vice President and
One Post Office Square Compliance Liaison BSA Compliance Officer
Boston, MA 02109      
   Jonathan S. Horwitz Judith Cohen
Custodian Senior Vice President Vice President, Clerk and
State Street Bank and and Treasurer Assistant Treasurer
Trust Company     
  Steven D. Krichmar Wanda M. McManus
Legal Counsel Vice President and Vice President, Senior Associate
Ropes & Gray LLP Principal Financial Officer Treasurer and Assistant Clerk
  
Trustees Janet C. Smith Nancy E. Florek
John A. Hill, Chairman Vice President, Principal Vice President, Assistant Clerk,
Jameson Adkins Baxter, Accounting Officer and Assistant Treasurer
Vice Chairman Assistant Treasurer and Proxy Manager
Charles B. Curtis   
Robert J. Darretta Susan G. Malloy  
Myra R. Drucker Vice President and
Charles E. Haldeman, Jr. Assistant Treasurer  
Paul L. Joskow  
Elizabeth T. Kennan Beth S. Mazor  
  Vice President

This report is for the information of shareholders of Putnam High Yield Advantage Fund. 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.putnam.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.


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 of Listed Registrants

Not applicable

Item 6. Schedule of Investments:

The registrant’s schedule of investments in unaffiliated issuers is included in the report to shareholders in Item 1 above.

Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End Management Investment Companies:

Not applicable

Item 8. Portfolio Managers of Closed-End Investment Companies

Not Applicable

Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers:

Not applicable

Item 10. Submission of Matters to a Vote of Security Holders:

Not applicable

 Item 11. Controls and Procedures:

(a) The registrant's principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the design and operation of such procedures are generally effective to provide reasonable assurance that information required to be disclosed by the registrant in this report is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

(b) Changes in internal control over financial reporting: Not applicable

Item 12. Exhibits:

(a)(1) Not applicable

(a)(2) Separate certifications for the principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are filed herewith.

(b) The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940, as amended, are filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Putnam High Yield Advantage Fund

By (Signature and Title):

/s/Janet C. Smith
Janet C. Smith
Principal Accounting Officer

Date: July 29, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By (Signature and Title):

/s/Charles E. Porter
Charles E. Porter
Principal Executive Officer

Date: July 29, 2008

By (Signature and Title):

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

Date: July 29, 2008