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- 21131
John Hancock Preferred Income Fund
(Exact name of registrant as specified in charter)
601 Congress Street, Boston, Massachusetts 02210
(Address of principal executive offices) (Zip code)
Alfred P. Ouellette
Senior Counsel and Assistant Secretary
601 Congress Street
Boston, Massachusetts 02210
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-663-4324
Date of fiscal year end: | July 31 |
Date of reporting period: | January 31, 2008 |
ITEM 1. REPORT TO SHAREHOLDERS.
Portfolio summary
Top 10 holdings1 | ||||
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Nexen, Inc., 7.35% | 3.7% | Interstate Power & Light Co., 8.375%, Ser B | 2.5% | |
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DPL Capital Trust II, 8.125%, 09-01-31 | 3.3% | PFGI Capital Corp., 7.75% | 2.4% | |
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Viacom, Inc., 6.85% | 2.8% | BGE Capital Trust II, 6.20% | 2.3% | |
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MetLife, Inc., 6.50%, Ser B | 2.7% | ING Groep NV, 7.05% | 2.2% | |
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FPC Capital I, 7.10%, Ser A | 2.6% | Telephone & Data Systems, Inc., 7.60%, Ser A | 2.1% | |
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Industry distribution1 | ||||
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Electric utilities | 23% | Broadcasting & cable TV | 3% | |
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Other diversified financial services | 12% | Regional banks | 3% | |
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Investment banking & brokerage | 8% | Integrated telecommunication services | 3% | |
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Diversified banks | 7% | Movies & entertainment | 3% | |
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Gas utilities | 6% | Real estate management & development | 2% | |
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Multi-line insurance | 5% | Automobile manufacturers | 2% | |
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Multi-utilities | 5% | Wireless telecommunication services | 2% | |
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Life & health insurance | 5% | Agricultural products | 2% | |
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Consumer finance | 4% | Specialized finance | 1% | |
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Oil & gas exploration & production | 4% | |||
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1 As a percentage of the Funds total investments on January 31, 2008.
Preferred Income Fund | Semiannual Report
6
F I N A N C I A L S T A T E M E N T S
Funds investments
Securities owned by the Fund on 1-31-08 (unaudited)
This schedule is divided into six main categories: bonds, capital preferred securities, common stocks, preferred stocks, purchased options and short-term investments. Bonds, capital preferred securities, common stocks and preferred stocks are further broken down by industry group. Short-term investments, which represent the Funds cash position, are listed last.
Interest | Maturity | Credit | Par value | |||
Issuer, description | rate | date | rating (A) | (000) | Value | |
Bonds 3.41% | $19,452,416 | |||||
| ||||||
(Cost $19,639,848) | ||||||
Electric Utilities 1.89% | 10,796,490 | |||||
| ||||||
Black Hills Corp., | ||||||
Note | 6.500% | 05-15-13 | BBB | $5,950 | 6,187,530 | |
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Entergy Gulf States, Inc., | ||||||
1st Mtg Bond | 6.200 | 07-01-33 | BBB+ | 5,000 | 4,608,960 | |
Gas Utilities 1.52% | 8,655,926 | |||||
| ||||||
Southern Union Co., | ||||||
Jr Sub Note Ser A | 7.200 | 11-01-66 | BB | 8,800 | 8,655,926 | |
Interest | Maturity | Credit | Par value | |||
Issuer, description | rate | date | rating (A) | (000) | Value | |
Capital preferred securities 10.19% | $58,200,602 | |||||
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(Cost $55,492,365) | ||||||
Diversified Banks 1.28% | 7,331,250 | |||||
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Lloyds TSB Bank Plc, (United | ||||||
Kingdom) (F) | 6.90% | 11-29-49 | A+ | $7,500 | 7,331,250 | |
Electric Utilities 4.88% | 27,858,240 | |||||
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DPL Capital Trust II | 8.125 | 09-01-31 | BB+ | 24,000 | 27,858,240 | |
Gas Utilities 4.03% | 23,011,112 | |||||
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KN Capital Trust I, Ser B | 8.56 | 04-15-27 | B | 17,500 | 15,925,000 | |
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KN Capital Trust III | 7.63 | 04-15-28 | B | 8,000 | 7,086,112 | |
Issuer | Shares | Value | ||||
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Common stocks 0.96% | $5,479,600 | |||||
(Cost $6,971,743) | ||||||
Electric Utilities 0.32% | 1,812,200 | |||||
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Great Plains Energy, Inc. | 65,000 | 1,812,200 | ||||
Multi-Utilities 0.64% | 3,667,400 | |||||
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TECO Energy, Inc. | 220,000 | 3,667,400 |
See notes to financial statements
Semiannual Report | Preferred Income Fund
7
F I N A N C I A L S T A T E M E N T S
Credit | |||
Issuer, description | rating (A) | Shares | Value |
Preferred stocks 133.88% | $764,313,970 | ||
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(Cost $801,492,190) | |||
Agricultural Products 2.35% | 13,437,538 | ||
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Ocean Spray Cranberries, Inc., 6.25%, Ser A (S) | BB+ | 143,000 | 13,437,538 |
Automobile Manufacturers 2.85% | 16,258,664 | ||
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Ford Motor Co., 7.50% | CCC+ | 40,000 | 692,000 |
| |||
General Motors Corp., 7.25%, Ser 04-15-41 | B | 378,700 | 6,570,445 |
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General Motors Corp., 7.25%, Ser 07-15-41 | B | 82,000 | 1,453,040 |
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General Motors Corp., 7.25%, Ser 02-15-52 | B | 254,300 | 4,330,729 |
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General Motors Corp., 7.375%, Ser 05-15-48 | B | 50,000 | 884,000 |
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General Motors Corp., 7.375%, Ser 10-01-51 | B | 129,000 | 2,328,450 |
Broadcasting & Cable TV 4.46% | 25,449,672 | ||
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CBS Corp., 6.75% | BBB | 193,600 | 4,563,152 |
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Comcast Corp., 7.00% | BBB+ | 232,000 | 5,614,400 |
| |||
Comcast Corp., 7.00%, Ser B | BBB+ | 629,000 | 15,272,120 |
Consumer Finance 6.33% | 36,158,409 | ||
| |||
Ford Motor Credit Co., 7.60% | B1 | 308,500 | 5,907,775 |
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HSBC Finance Corp., 6.00% | AA | 134,200 | 3,184,566 |
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HSBC Finance Corp., 6.36%, Depositary Shares, Ser B | A | 297,000 | 6,902,280 |
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HSBC Finance Corp., 6.875% | AA | 404,800 | 9,877,120 |
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SLM Corp., 6.00% | BBB | 194,100 | 3,682,077 |
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SLM Corp., 6.97%, Ser A | BB | 147,391 | 6,604,591 |
Diversified Banks 8.71% | 49,733,893 | ||
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BAC Capital Trust IV, 5.875% | A+ | 30,000 | 664,800 |
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Bank One Capital Trust VI, 7.20% | A | 81,100 | 2,034,799 |
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Barclays Bank Plc, 7.10%, Ser 3 (United Kingdom) (F) | A+ | 55,000 | 1,389,850 |
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Fleet Capital Trust VIII, 7.20% | A+ | 489,250 | 12,226,358 |
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HSBC Holdings Plc, 6.20%, Ser A (United Kingdom) (F) | A | 161,000 | 3,847,900 |
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Royal Bank of Scotland Group Plc, 5.75%, Ser L | |||
(United Kingdom) (F) | A | 550,900 | 12,229,980 |
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Royal Bank of Scotland Group Plc, 6.35%, Ser N, ADR | |||
(United Kingdom) (F) | A | 25,000 | 600,000 |
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Royal Bank of Scotland Group Plc, | |||
7.25%, Ser T (United Kingdom) (F) | A | 59,000 | 1,504,500 |
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Santander Finance Preferred SA, Unipersonal, 6.41%, Ser 1 | |||
(Spain) (F) | A+ | 225,000 | 5,316,750 |
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USB Capital VIII, 6.35%, Ser 1 | A+ | 179,800 | 4,360,150 |
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USB Capital X, 6.50% | A+ | 45,000 | 1,102,050 |
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Wachovia Preferred Funding Corp., 7.25%, Ser A | A | 69,000 | 1,747,770 |
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Wells Fargo Capital Trust IV, 7.00% | AA | 108,100 | 2,708,986 |
Electric Utilities 27.47% | 156,834,233 | ||
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Duquesne Light Co., 6.50% | BB | 73,650 | 3,806,784 |
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Entergy Arkansas, Inc., 6.70% | AAA | 25,300 | 650,210 |
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Entergy Mississippi, Inc., 7.25% | A | 363,900 | 9,188,475 |
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FPC Capital I, 7.10%, Ser A | BBB | 884,891 | 22,157,671 |
See notes to financial statements
Preferred Income Fund | Semiannual Report
8
F I N A N C I A L S T A T E M E N T S
Credit | |||
Issuer, description | rating (A) | Shares | Value |
Electric Utilities (continued) | |||
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FPL Group Capital Trust I, 5.875% | BBB+ | 502,200 | $12,027,690 |
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FPL Group Capital, Inc., 7.45%, Ser E | BBB+ | 110,000 | 2,871,000 |
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Georgia Power Capital Trust VII, 5.875% | BBB+ | 250,600 | 5,971,798 |
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Georgia Power Co., 6.00%, Ser R | A | 415,497 | 10,387,425 |
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HECO Capital Trust III, 6.50% | BB+ | 375,400 | 8,821,900 |
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Interstate Power & Light Co., 8.375%, Ser B | Baa2 | 700,000 | 20,825,000 |
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NSTAR Electric Co., 4.78% | A | 15,143 | 1,241,726 |
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PPL Electric Utilities Corp., 6.25%, Depositary Shares | BBB | 300,000 | 7,218,750 |
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PPL Energy Supply, LLC, 7.00% | BBB | 563,160 | 14,377,475 |
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Southern California Edison Co., 6.125% | BBB | 119,000 | 11,635,975 |
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Virginia Power Capital Trust, 7.375% | BBB | 596,250 | 15,055,312 |
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Westar Energy, Inc., 6.10% | AA | 97,300 | 2,485,042 |
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Xcel Energy, Inc., 7.60% | BBB | 320,000 | 8,112,000 |
Gas Utilities 3.21% | 18,327,422 | ||
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Southern Union Co., 5.00%, Conv | BBB | 10,000 | 483,700 |
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Southern Union Co., 7.55% | BB | 296,600 | 7,459,490 |
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Southwest Gas Capital II, 7.70% | BB | 412,400 | 10,384,232 |
Integrated Telecommunication Services 4.26% | 24,351,861 | ||
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AT&T, Inc., 6.375% | A | 66,000 | 1,646,040 |
| |||
Telephone & Data Systems, Inc., 6.625% | BB+ | 233,000 | 4,660,000 |
| |||
Telephone & Data Systems, Inc., 7.60%, Ser A | BB+ | 816,553 | 18,045,821 |
Investment Banking & Brokerage 11.81% | 67,418,363 | ||
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Bear Stearns Capital Trust III, 7.80% | BBB+ | 187,300 | 4,665,643 |
| |||
Goldman Sachs Group, Inc., 6.20%, Ser B | A | 460,000 | 11,362,000 |
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Lehman Brothers Holdings Capital Trust III, 6.375%, Ser K | A | 150,000 | 3,480,000 |
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Lehman Brothers Holdings, Inc., 5.94%, | |||
Depositary Shares, Ser C | A | 175,600 | 7,568,360 |
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Merrill Lynch Preferred Capital Trust III, 7.00% | A | 366,400 | 8,984,128 |
| |||
Merrill Lynch Preferred Capital Trust IV, 7.12% | A | 278,752 | 6,899,112 |
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Merrill Lynch Preferred Capital Trust V, 7.28% | A | 367,000 | 9,116,280 |
| |||
Morgan Stanley Capital Trust III, 6.25% | A | 192,400 | 4,367,480 |
| |||
Morgan Stanley Capital Trust IV, 6.25% | A | 57,000 | 1,268,250 |
| |||
Morgan Stanley Capital Trust V, 5.75% | A1 | 347,000 | 7,332,110 |
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Morgan Stanley Capital Trust VI, 6.60% | A | 100,000 | 2,375,000 |
Life & Health Insurance 3.19% | 18,263,242 | ||
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Lincoln National Capital VI, | |||
6.75%, Ser F | A | 175,800 | 4,310,616 |
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PLC Capital Trust IV, 7.25% | BBB+ | 224,600 | 5,437,566 |
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PLC Capital Trust V, 6.125% | BBB+ | 256,000 | 5,532,160 |
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Prudential Plc, 6.50% (United Kingdom) (F) | A | 122,000 | 2,982,900 |
Movies & Entertainment 4.18% | 23,838,573 | ||
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Viacom, Inc., 6.85% | BBB | 985,065 | 23,838,573 |
See notes to financial statements
Semiannual Report | Preferred Income Fund
9
F I N A N C I A L S T A T E M E N T S
Credit | |||
Issuer, description | rating (A) | Shares | Value |
Multi-Line Insurance 11.60% | $66,208,566 | ||
| |||
Aegon NV, 6.375% (Netherlands) (F) | A | 444,900 | 10,601,967 |
| |||
Aegon NV, 6.50% (Netherlands) (F) | A | 116,100 | 2,767,824 |
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ING Groep NV, 6.125% (Netherlands) (F) | A | 61,500 | 1,450,785 |
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ING Groep NV, 6.20% (Netherlands) (F) | A | 156,993 | 3,736,433 |
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ING Groep NV, 7.05% (Netherlands) (F) | A | 760,100 | 18,751,667 |
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ING Groep NV, 7.20% (Netherlands) (F) | A | 100,000 | 2,485,000 |
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ING Groep NV, 7.375% (Netherlands) (F) | A | 120,500 | 3,089,620 |
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MetLife, Inc., 6.50%, Ser B | BBB | 950,500 | 23,325,270 |
Multi-Utilities 6.72% | 38,351,627 | ||
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Baltimore Gas & Electric Co., 6.99%, Ser 1995 | Ba1 | 40,000 | 4,107,500 |
| |||
BGE Capital Trust II, 6.20% | BBB | 836,825 | 19,615,178 |
| |||
DTE Energy Trust I, 7.80% | BB+ | 140,400 | 3,525,444 |
| |||
PNM Resources, Inc., 6.75%, Conv | BB+ | 284,500 | 10,495,205 |
| |||
Public Service Electric & Gas Co., 4.18%, Ser B | BB+ | 7,900 | 608,300 |
Oil & Gas Exploration & Production 5.79% | 33,071,451 | ||
| |||
Chesapeake Energy Corp., 6.25%, Conv (G) | B+ | 4,530 | 1,357,301 |
| |||
Nexen, Inc., 7.35% (Canada) (F) | BB+ | 1,261,000 | 31,714,150 |
Other Diversified Financial Services 17.64% | 100,709,606 | ||
| |||
ABN AMRO Capital Funding Trust V, 5.90% | A | 626,100 | 13,855,593 |
| |||
ABN AMRO Capital Funding Trust VII, 6.08% | A | 338,000 | 7,696,260 |
| |||
Bank of America Corp., 6.204%, | |||
Depositary Shares, Ser D | A+ | 305,000 | 7,179,700 |
| |||
Citigroup Capital VII, 7.125% | A | 336,500 | 8,362,025 |
| |||
Citigroup Capital VIII, 6.95% | A | 658,600 | 15,892,018 |
| |||
Citigroup Capital X, 6.10% | A | 40,000 | 886,800 |
| |||
Citigroup Capital XI, 6.00% | A | 25,000 | 550,250 |
| |||
DB Capital Funding VIII, 6.375% | A+ | 471,250 | 11,295,863 |
| |||
DB Capital Trust II, 6.55% | A+ | 526,750 | 12,884,305 |
| |||
JPMorgan Chase Capital X, 7.00%, Ser J | A | 615,100 | 15,469,765 |
| |||
JPMorgan Chase Capital XI, 5.875%, Ser K | A | 289,700 | 6,637,027 |
Real Estate Management & Development 3.79% | 21,639,087 | ||
| |||
Duke Realty Corp., 6.50%, Depositary Shares, Ser K | BBB | 110,000 | 2,409,000 |
| |||
Duke Realty Corp., 6.60%, Depositary Shares, Ser L | BBB | 109,840 | 2,443,940 |
| |||
Duke Realty Corp., 6.625%, Depositary Shares, Ser J | BBB | 66,525 | 1,476,190 |
| |||
Public Storage, Inc., 6.45%, Depositary Shares, Ser X | BBB+ | 25,000 | 566,000 |
| |||
Public Storage, Inc., 6.50%, Depositary Shares, Ser W | BBB+ | 100,000 | 2,278,000 |
| |||
Public Storage, Inc., 7.50%, Depositary Shares, Ser V | BBB+ | 497,643 | 12,465,957 |
Regional Banks 4.39% | 25,043,848 | ||
| |||
KeyCorp Capital VI, 6.125% | BBB | 25,900 | 566,433 |
| |||
PFGI Capital Corp., 7.75% | A | 796,000 | 20,521,915 |
| |||
Wachovia Corp., 8.00% | A | 150,000 | 3,955,500 |
Reinsurance 0.57% | 3,230,410 | ||
| |||
RenaissanceRe Holdings Ltd., 6.08%, Ser C (Bermuda) (F) | BBB+ | 153,100 | 3,230,410 |
See notes to financial statements
Preferred Income Fund | Semiannual Report
10
F I N A N C I A L S T A T E M E N T S
Credit | ||||||
Issuer, description | rating (A) | Shares | Value | |||
Specialized Finance 1.10% | $6,275,022 | |||||
| ||||||
CIT Group, Inc., 6.35%, Ser A | BBB+ | 145,000 | 3,137,800 | |||
| ||||||
Repsol International Capital Ltd., 7.45%, Ser A | ||||||
(Cayman Islands) (F) | BB+ | 123,610 | 3,137,222 | |||
Thrifts & Mortgage Finance 0.99% | 5,628,600 | |||||
| ||||||
Sovereign Capital Trust V, 7.75% | BB+ | 239 | 5,628,600 | |||
Wireless Telecommunication Services 2.47% | 14,083,883 | |||||
| ||||||
United States Cellular Corp., 7.50% | BB+ | 582,460 | 14,083,883 | |||
Number of | Exercise | Expiration | ||||
Issuer | contracts | price | date | Value | ||
Purchased options 0.02% | $77,070 | |||||
| ||||||
(Cost $353,865) | ||||||
Options Puts 0.01% | 77,070 | |||||
| ||||||
iShares S&P SmallCap Index Fund | 2,202 | $88 | March 08 | 77,070 | ||
Interest | Maturity | Credit | Par value | |||
Issuer, description | rate | date | rating (A) | (000) | Value | |
Short-term investments 0.17% | $992,000 | |||||
| ||||||
(Cost $992,000) | ||||||
Government U.S. Agency 0.17% | 992,000 | |||||
| ||||||
Federal Home Loan Bank, | ||||||
Discount Note | 1.85% | (Y) | 02-01-08 | AAA | $992 | 992,000 |
Total investments (Cost $884,942,011) 148.63% | $848,515,658 | |||||
| ||||||
Other assets and liabilities, net 0.43% | $2,424,220 | |||||
| ||||||
Fund preferred shares, at liquidation value (49.06%) | ($280,062,588) | |||||
| ||||||
Total net assets applicable to common shareholders 100.00% | $570,877,290 | |||||
|
The percentage shown for each investment category is the total value of that category, at liquidation value, as a percentage of the net assets applicable to common shareholders.
ADR American Depositary Receipt
(A) Credit ratings are unaudited and are rated by Moodys Investors Service or Fitch where Standard & Poors ratings are not available unless indicated otherwise.
(F) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer.
(G) Security rated internally by John Hancock Advisers, LLC.
(S) This security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $13,437,538 or 2.35% of the net assets applicable to common shareholders as of January 31, 2008.
(Y) Represents current yield as of January 31, 2008.
See notes to financial statements
Semiannual Report | Preferred Income Fund
11
F I N A N C I A L S T A T E M E N T S
Financial statements
Statement of assets and liabilities 1-31-08 (unaudited)
This Statement of Assets and Liabilities is the Funds balance sheet. It shows the value of what the Fund owns, is due and owes. Youll also find the net asset value for each common share.
Assets | |
| |
Investments at value (cost $884,942,011) | $848,515,658 |
Cash | 802 |
Cash collateral at broker for future contracts (Note 2) | 1,260,000 |
Receivable for investments sold | 1,362,832 |
Dividends and interest receivable | 3,721,060 |
Receivable from affiliates | 131,893 |
Total assets | 854,992,245 |
Liabilities | |
| |
Unrealized depreciation of swap contracts (Note 2) | 2,955,611 |
Payable for futures variation margin (Note 2) | 754,688 |
Payable to affiliates | |
Management fees | 13,923 |
Other | 101,516 |
Other payables and accrued expenses | 177,146 |
Total liabilities | 4,002,884 |
Auction Preferred Shares (APS) Series M, including accrued dividends, | |
unlimited number of shares of beneficial interest authorized with no par | |
value, 2,240 shares issued, liquidation preference of $25,000 per share | 56,086,327 |
APS Series T, including accrued dividends, unlimited number of shares of | |
beneficial interest authorized with no par value, 2,240 shares issued, | |
liquidation preference of $25,000 per share | 56,014,446 |
APS Series W, including accrued dividends, unlimited number of shares | |
of beneficial interest authorized with no par value, 2,240 shares issued, | |
liquidation preference of $25,000 per share | 56,002,034 |
APS Series TH, including accrued dividends, unlimited number of shares | |
of beneficial interest authorized with no par value, 2,240 shares issued, | |
liquidation preference of $25,000 per share | 56,000,000 |
APS Series F, including accrued dividends, unlimited number of shares of | |
beneficial interest authorized with no par value, 2,240 shares issued, | |
liquidation preference of $25,000 per share | 56,009,264 |
Net assets | |
| |
Common shares capital paid-in | 611,606,906 |
Accumulated net realized gain on investments, financial futures contracts | |
and swap contracts | 6,467,594 |
Net unrealized depreciation of investments, financial futures contracts | |
and swap contracts | (43,870,424) |
Accumulated distributions in excess of net investment income | (3,326,786) |
Net assets applicable to common shares | $570,877,290 |
Net asset value per common share | |
| |
Based on 25,807,938 shares of beneficial interest outstanding unlimited | |
number of shares authorized with no par value. | $22.12 |
See notes to financial statements
Preferred Income Fund | Semiannual Report
12
F I N A N C I A L S T A T E M E N T S
Statement of operations For the period ended 1-31-08 (unaudited)1
This Statement of Operations summarizes the Funds investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) and distributions paid to APS shareholders for the period stated.
Investment income | |
| |
Dividends (net of foreign withholding taxes of $7,512) | $27,423,376 |
Interest | 3,212,542 |
Total investment income | 30,635,918 |
Expenses | |
| |
Investment management fees (Note 3) | 3,182,900 |
Accounting and legal services fees (Note 3) | 54,252 |
APS auction fees | 358,116 |
Custodian fees | 81,295 |
Printing fees | 40,384 |
Professional fees | 35,490 |
Trustees fees | 20,951 |
Transfer agent fees | 18,449 |
Registration and filing fees | 14,780 |
Miscellaneous | 18,610 |
Total expenses | 3,825,227 |
Less expense reductions (Note 3) | (661,291) |
Net expenses | 3,163,936 |
Net investment income | 27,471,982 |
Realized and unrealized gain (loss) | |
| |
Net realized gain (loss) on | |
Investments | 2,493,070 |
Financial futures contracts | (3,249,922) |
Swap contracts | 1,071,797 |
314,945 | |
Change in net unrealized appreciation (depreciation) of | |
Investments | (8,483,417) |
Financial futures contracts | (4,688,501) |
Swap contracts | (4,835,290) |
(18,007,208) | |
Net realized and unrealized loss | (17,692,263) |
Distributions to APS | |
Distributions to APS Series M | (1,492,130) |
Distributions to APS Series T | (1,473,628) |
Distributions to APS Series W | (1,522,665) |
Distributions to APS Series TH | (1,490,780) |
Distributions to APS Series F | (1,482,741) |
(7,461,944) | |
Increase in net assets from operations | $2,317,775 |
1 Semiannual period from 8-1-07 to 1-31-08.
See notes to financial statements
Semiannual Report | Preferred Income Fund
13
F I N A N C I A L S T A T E M E N T S
Statement of changes in net assets
These Statements of Changes in Net Assets show how the value of the Funds net assets has changed during the last two periods. The difference reflects earnings less expenses, any investment gains and losses, distributions, if any, paid to shareholders and the net of Fund share transactions.
Year | Period | |
ended | ended | |
7-31-07 | 1-31-081 | |
Increase (decrease) in net assets | ||
| ||
From operations | ||
Net investment income | $55,133,776 | $27,471,982 |
Net realized gain | 10,246,873 | 314,945 |
Change in net unrealized appreciation (depreciation) | (16,784,780) | (18,007,208) |
Distributions to APS | (14,161,545) | (7,461,944) |
Increase in net assets resulting from operations | 34,434,324 | 2,317,775 |
Distributions to common shareholders | ||
From net investment income | (47,933,930) | (24,001,383) |
From net realized gain | (5,449,360) | (3,948,356) |
(53,383,290) | (27,949,739) | |
From Fund share transactions (Note 4) | 1,862,756 | |
Total decrease | (17,086,210) | (25,631,964) |
Net assets | ||
| ||
Beginning of period | 613,595,464 | 596,509,254 |
End of period2 | $596,509,254 | $570,877,290 |
1 Semiannual period from 8-1-07 to 1-31-08. Unaudited.
2 Includes accumulated (distributions in excess) net investment income of $664,559 and $3,326,786, respectively.
See notes to financial statements
Preferred Income Fund | Semiannual Report
14
F I N A N C I A L S T A T E M E N T S
Financial highlights
The Financial Highlights show how the Funds net asset value for a share has changed since the end of the previous period.
COMMON SHARES | |||||||
Period ended | 7-31-031,2 | 7-31-041 | 7-31-051 | 7-31-06 | 7-31-07 | 1-31-083 | |
Per share operating performance | |||||||
| |||||||
Net asset value, beginning of period | $23.884 | $25.15 | $24.59 | $25.78 | $23.85 | $23.11 | |
Net investment income5 | 2.02 | 2.31 | 2.30 | 2.24 | 2.13 | 1.06 | |
Net realized and unrealized | |||||||
gain (loss) on investments | 1.32 | (0.25) | 1.16 | (1.66) | (0.25) | (0.68) | |
Distributions to APS | (0.12) | (0.13) | (0.26) | (0.45) | (0.55) | (0.29) | |
Total from investment operations | 3.22 | 1.93 | 3.20 | 0.13 | 1.33 | 0.09 | |
Less distributions to | |||||||
common shareholders | |||||||
From net investment income | (1.80) | (2.16) | (2.01) | (1.86) | (1.86) | (0.93) | |
From net realized gain | | (0.33) | | (0.20) | (0.21) | (0.15) | |
(1.80) | (2.49) | (2.01) | (2.06) | (2.07) | (1.08) | ||
Capital charges | |||||||
Offering costs related | |||||||
to common shares | (0.02) | | | | | | |
Offering costs and underwriting | |||||||
discounts related to APS | (0.13) | | | | | | |
(0.15) | | | | | | ||
Net asset value, end of period | $25.15 | $24.59 | $25.78 | $23.85 | $23.11 | $22.12 | |
Per share market value, | |||||||
end of period | $24.32 | $24.14 | $23.46 | $23.63 | $22.70 | $21.97 | |
Total return at net asset value6,7 (%) | 13.468,9 | 7.978 | 13.878 | 1.37 | 5.46 | 0.779 | |
Total return at market value6,7 (%) | 4.789,10 | 9.65 | 5.55 | 10.37 | 4.56 | 1.899 | |
Ratios and supplemental data | |||||||
| |||||||
Net assets applicable common | |||||||
shares, end of period (in millions) | $645 | $633 | $663 | $614 | $597 | $571 | |
Ratio of net expenses to average | |||||||
net assets11 (%) | 1.0012 | 1.02 | 1.02 | 1.03 | 1.03 | 1.1212 | |
Ratio of gross expenses to average | |||||||
net assets13 (%) | 1.2812 | 1.31 | 1.31 | 1.31 | 1.32 | 1.3512 | |
Ratio of net investment income | |||||||
to average net assets14 (%) | 9.1112 | 9.21 | 9.03 | 9.14 | 8.77 | 9.6912 | |
Portfolio turnover (%) | 209 | 21 | 24 | 18 | 15 | 69 | |
Senior securities | |||||||
| |||||||
Total value of APS outstanding | |||||||
(in millions) | $280 | $280 | $280 | $280 | $280 | $280 | |
Involuntary liquidation preference | |||||||
per unit (in thousands) | $25 | $25 | $25 | $25 | $25 | $25 | |
Average market value per unit | |||||||
(in thousands) | $25 | $25 | $25 | $25 | $25 | $25 | |
Asset coverage per unit 15 | $83,686 | $79,892 | $83,539 | $79,097 | $78,080 | $75,588 |
See notes to financial statements
Semiannual Report | Preferred Income Fund
15
F I N A N C I A L S T A T E M E N T S
Notes to Financial Highlights
1 Audited by previous Independent Registered Public Accounting Firm.
2 Inception period from 8-27-02 to 7-31-03.
3 Semiannual period from 8-1-07 to 1-31-08. Unaudited.
4 Reflects the deduction of a $1.125 per share sales load.
5 Based on the average of the shares outstanding.
6 Total returns would have been lower had certain expenses not been reduced during the periods shown.
7 Total return based on net asset value reflects changes in the Funds net asset value during each period. Total return based on market value reflects changes in market value. Each figure assumes that dividend and capital gain distributions, if any, were reinvested. These figures will differ depending upon the level of any discount from or premium to net asset value at which the Funds shares traded during the periods.
8 Unaudited.
9 Not annualized.
10 Assumes dividend reinvestment and a purchase at the offering price of $25.00 per share on the inception date and a sale at the current market price on the last day of the period.
11 Ratios calculated on the basis of net expenses relative to the average net assets of common shares. Without the exclusion of preferred shares, the annualized ratios of net expenses would have been 0.72%, 0.71%, 0.72%, 0.71%, 0.71% and 0.75% for the years ended 7-31-03, 7-31-04, 7-31-05, 7-31-06, 7-31-07 and the period ended 1-31-08, respectively.
12 Annualized.
13 Ratios calculated on the basis of gross expenses relative to the average net assets of common shares that does not take into consideration expense reductions during the periods shown. Without the exclusion of preferred shares, the annualized ratios of gross expenses would have been 0.92%, 0.91%, 0.92%, 0.91%, 0.91% and 0.90% for the years ended 7-31-03, 7-31-04, 7-31-05, 7-31-06, 7-31-07 and the period ended 1-31-08, respectively.
14 Ratios calculated on the basis of net investment income relative to the average net assets of common shares. Without the exclusion of preferred shares, the annualized ratios of net investment income would have been 6.59%, 6.43%, 6.33%, 6.33%, 6.08% and 6.47% for the years ended 7-31-03, 7-31-04, 7-31-05, 7-31-06, 7-31-07 and the period ended 1-31-08, respectively.
15 Calculated by subtracting the Funds total liabilities from the Funds total assets and dividing that amount by the number of APS outstanding as of the applicable 1940 Act Evaluation Date, which may differ from the financial reporting date.
See notes to financial statements
Preferred Income Fund | Semiannual Report
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Notes to financial statements (unaudited)
Note 1
Organization
John Hancock Preferred Income Fund (the Fund) is a diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act).
Note 2
Significant accounting policies
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from those estimates. The following summarizes the significant accounting policies of the Fund:
Security valuation
The net asset value of the common shares of the Fund is determined daily as of the close of the New York Stock Exchange (NYSE), normally at 4:00 p.m., Eastern Time. Short-term debt investments that have a remaining maturity of 60 days or less are valued at amortized cost, and thereafter assume a constant amortization to maturity of any discount or premium, which approximates market value. All other securities held by the Fund are valued at the last sale price or official closing price (closing bid price or last evaluated quote if no sale has occurred) as of the close of business on the principal securities exchange (domestic or foreign) on which they trade or, lacking any sales, at the closing bid price. Securities traded only in the over-the-counter market are valued at the last bid price quoted by brokers making markets in the securities at the close of trading. Securities for which there are no such quotations, principally debt securities, are valued based on the evaluated prices provided by an independent pricing service, which utilizes both dealer-supplied and electronic data processing techniques, which take into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data.
Other assets and securities for which no such quotations are readily available are valued at fair value as determined in good faith under consistently applied procedures established by and under the general supervision of the Board of Trustees. Generally, trading in non-U.S. securities is substantially completed each day at various times prior to the close of trading on the NYSE. The values of such securities used in computing the net asset value of the Funds shares are generally determined as of such times. Occasionally, significant events that affect the values of such securities may occur between the times at which such values are generally determined and the close of the NYSE. Upon such an occurrence, these securities will be valued at fair value as determined in good faith under consistently applied procedures established by and under the general supervision of the Board of Trustees.
Investment risk
The Fund may invest a portion of its assets in securities of issuers that hold mortgage securities, including subprime mortgage securities. The value of these securities is sensitive to changes in economic conditions, including delinquencies and/or defaults, and may be adversely affected by shifts in the markets perception of the issuers and changes in interest rates.
Investment transactions
Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment security transactions are reported on trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date net of foreign withholding
Semiannual Report | Preferred Income Fund
17
taxes. Discounts/premiums are accreted/ amortized for financial reporting purposes. Realized gains and losses from investment transactions are recorded on an identified cost basis.
Guarantees and indemnifications
Under the Funds organizational documents, its Officers and Trustees are indemnified against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Funds maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred.
Expenses
The majority of expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund are allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
Futures
The Fund may purchase and sell financial futures contracts and options on those contracts. The Fund invests in contracts based on financial instruments such as U.S. Treasury Bonds or Notes or on securities indices such as the Standard & Poors 500 Index, in order to hedge against a decline in the value of securities owned by the Fund.
Initial margin deposits required upon entering into futures contracts are satisfied by the delivery of specific securities or cash as collateral to the broker (the Funds agent in acquiring the futures position). If the position is closed out by an opposite position prior to the settlement date of the futures contract, a final determination of variation margin is made, cash is required to be paid to or released by the broker and the Fund realizes a gain or loss.
When the Fund sells a futures contract based on a financial instrument, the Fund becomes obligated to deliver that kind of instrument at an agreed upon date for a specified price. The Fund realizes a gain or loss depending on whether the price of an offsetting purchase is less or more than the price of the initial sale or on whether the price of an offsetting sale is more or less than the price of the initial purchase. The Fund could be exposed to risks if it could not close out futures positions because of an illiquid secondary market or the inability of counterparties to meet the terms of their contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade.
The Fund had the following financial futures contracts open on January 31, 2008:
NUMBER OF | UNREALIZED | |||
OPEN CONTRACTS | CONTRACTS | POSITION | EXPIRATION | DEPRECIATION |
| ||||
U.S. 10-Year Treasury Note | 210 | Short | Mar 2008 | $1,133,500 |
U.S. 10-Year Treasury Note | 840 | Short | Mar 2008 | 3,354,960 |
Total | $4,488,460 |
Options
The Fund may purchase and sell put and call options on securities (whether or not it holds the securities in its portfolio).
When the Fund writes a put or call option, an amount equal to the premium received by the Fund is recorded as a liability and is subsequently marked-to-market to reflect the current market value of the option written. If an option expires or if the Fund enters into an offsetting purchase option, the Fund realizes a gain (or loss if the cost of an offsetting purchase option exceeds the premium received when the option was written). If a written call option is exercised, the Fund realizes a gain or loss from the sale of the underlying security with the proceeds of the sale increased by the premium originally received. If a written put option is exercised, the amount of the premium originally received reduces the cost of the security that the Fund purchases upon exercise of the option.
Preferred Income Fund | Semiannual Report
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When the Fund purchases a put or call option, the premium paid by the Fund is included in the Portfolio of Investments and subsequently marked-to-market to reflect the current market value of the option. If the purchased option expires, the Fund realizes a loss for the cost of the option. If the Fund enters into a closing sale transaction, the Fund realizes a gain or loss, depending on whether proceeds from the closing sale transaction are greater or less than the original cost of the option. If the Fund exercises a call option, the cost of the securities acquired by exercising the call is increased by the premium paid to buy the call. If the Fund exercises a put option, it realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are decreased by the premium originally paid.
The Fund may use options to manage exposure to fluctuations in currency values. Writing puts and buying calls may increase the Funds exposure to the underlying instrument. Buying puts and writing calls may decrease the Funds exposure to the underlying instrument. Losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts or if the counterparties do not perform under the terms of the contract.
The Fund had no written option transactions during the period ended January 31, 2008.
Swap contracts
The Fund may enter into swap transactions in order to hedge the value of the Funds portfolio against interest rate fluctuations or to enhance the Funds income. Interest rate swaps represent an agreement between two counterparties to exchange cash flows based on the difference in the two interest rates, applied to the notional principal amount for a specified period. The payment flows are usually netted against each other, with the difference being paid by one party to the other. The Fund settles accrued net receivable or payable under the swap contracts on a periodic basis.
The Fund records changes in the value of the swaps as unrealized gains or losses on swap contracts. Net periodic payments accrued, but not yet received (paid) are included in change in the unrealized appreciation/ depreciation on the Statement of Operations. Accrued interest income and interest expense on the swap contracts are recorded as realized gain (loss).
Swap contracts are subject to risks related to the counterpartys ability to perform under the contract, and may decline in value if the counterpartys creditworthiness deteriorates. The risks may arise from unanticipated movement in interest rates. The Fund may also suffer losses if it is unable to terminate outstanding swap contracts or reduce its exposure through offsetting transactions.
The Fund had the following interest rate swap contracts open on January 31, 2008:
RATE TYPE | ||||||
|
||||||
PAYMENTS | UNREALIZED | |||||
NOTIONAL | PAYMENTS | RECEIVED | TERMINATION | APPRECIATION | ||
AMOUNT | MADE BY FUND | BY FUND | DATE | COUNTERPARTY | (DEPRECIATION) | |
| ||||||
$70,000,000 | 2.56% (a) | 3-month LIBOR | Jun 2008 | Morgan Stanley | $557,954 | |
70,000,000 | 4.37% (a) | 3-month LIBOR | Nov 2010 | Bank of America | (2,352,987) | |
70,000,000 | 3.79% (a) | 3-month LIBOR | Jan 2011 | Morgan Stanley | (1,160,578) | |
Total | ($2,955,611) | |||||
Federal income taxes
The Fund qualifies as a regulated investment company by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income that is distributed to shareholders. Therefore, no federal income tax provision is required.
The Fund has adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty
Semiannual Report | Preferred Income Fund
19
in Income Taxes, an interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not have a material impact on the Funds finanacial statements. Each of the Funds federal tax returns for the prior three fiscal years remains subject to examination by the Internal Revenue Service.
New accounting pronouncement
In September 2006, FASB Standard No. 157, Fair Value Measurements (FAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishing a framework for measuring fair value and expands disclosure about fair value measurements. As of January 31, 2008, management does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements; however, additional disclosures regarding pricing sources will be required about the inputs used to develop the measurements of fair value and the related realized and unrealized gain/loss as reported in the Statement of Operations for a fiscal period.
Distribution of income and gains
The Fund records distributions to shareholders from net investment income and net realized gains, if any, on the ex-dividend date. During the year ended July 31, 2007, the tax character of distributions paid was as follows: ordinary income $64,184,566 and long-term capital gain $3,360,268. Distributions paid by the Fund with respect to each class of shares are calculated in the same manner, at the same time and are in the same amount, except for the effect of expenses that may be applied differently to each class.
Such distributions, on a tax basis, are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Funds financial statements as a return of capital.
Note 3
Management fee and transactions with
affiliates and others
The Fund has an investment management contract with John Hancock Advisers, LLC (the Adviser), a wholly owned subsidiary of the John Hancock Financial Services, Inc., a subsidiary of Manulife Financial Corporation (MFC). Under the investment management contract, the Fund pays a daily management fee to the Adviser at an annual rate of 0.75% of the Funds average daily net asset value and the value attributable to the Auction Preferred Shares (collectively, managed assets). The Fund has a subadvisory agreement with MFC Global Investment Management (U.S.), LLC, a subsidiary of John Hancock Financial Services, Inc. The Fund is not responsible for payment of subadvisory fees.
The Adviser has contractually agreed to limit the Funds management fee, on an annual basis, to the following: 0.55% of the Funds average daily managed assets until the fifth anniversary of the commencement of the Funds operations, 0.60% of such assets in the sixth year, 0.65% of such assets in the seventh year and 0.70% of average daily managed assets in the eighth year. Accordingly, the expense reductions related to the reduction in management fees amounted to $661,291 for the period ended January 31, 2008. The effective rate for the period ended January 31, 2008 is 0.59% of the Funds managed assets. After the eighth year, the Adviser will no longer waive a portion of the management fee.
The Fund has an agreement with the Adviser and affiliates to perform necessary tax, accounting, compliance, legal and other administrative services for the Fund. The compensation for the period amounted to $54,252 with an effective rate of 0.01% of the Funds average managed assets.
Mr. James R. Boyle is Chairman of the Adviser, as well as affiliated Trustee of the Fund, and is compensated by the Adviser and/or its affiliates. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer, for tax purposes, their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan.
Preferred Income Fund | Semiannual Report
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The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Funds deferred compensation liability are recorded on the Funds books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investments, as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund.
Note 4
Fund share transactions
Common shares
This listing illustrates the reclassification of the Funds capital accounts, dividend reinvestments and the number of common shares outstanding at the beginning and end of the year ended July 31, 2007, and the period ended January 31, 2008, along with the corresponding dollar value.
Year ended 7-31-07 | Period ended 1-31-08 1 | |||
Shares | Amount | Shares | Amount | |
Beginning of period | 25,732,207 | $610,159,568 | 25,807,938 | $611,606,906 |
Distributions reinvested | 75,731 | 1,862,756 | | |
Reclassification of capital accounts | | (415,418) | | |
End of period | 25,807,938 | $611,606,906 | 25,807,938 | $611,606,906 |
1Semiannual period from 8-1-07 to 1-31-08. Unaudited.
Auction preferred shares
The Fund issued a total of 11,200 Auction Preferred Shares (2,240 shares of Series M, 2,240 shares of Series T, 2,240 shares of Series W, 2,240 shares of Series TH and 2,240 shares of Series F) (collectively, the APS) on October 23, 2002, in a public offering. The underwriting discount of $2,800,000 has been charged to capital paid-in of common shares during the period ended July 31, 2003. Offering costs of $617,673 related to common shares and offering costs of $385,442 incurred in connection with the preferred shares were charged to the Funds capital paid-in during the period ended July 31, 2003.
APS holders may be subject to auction risk. The dividend rate for the APS is normally set through an auction process, where holders may indicate the dividend rate at which they would be willing to hold or sell their APS or purchase additional APS. An auction provides liquidity for the APS; however, holders may not be able to remarket their APS at an auction. APS will not be remarketed if there are more APS offered for sale than there are buyers. If the APS are unable to be remarketed on an auction date, a maximum interest rate is applied to the APS to compensate the investor for having to hold the shares. In the case of the Funds APS, the maximum interest rate is the higher of 125 bps over or 125% of the 30-day AA Commercial Paper Rate on the date of the auction. If sufficient clearing bids do not exist at an auction, holders wishing to sell will not be able to sell all, and may not be able to sell any, of such APS in the auction. As a result, an investment in APS may be illiquid. Neither broker-dealers nor the Fund are obligated to purchase APS in an auction or otherwise, nor is the Fund required to redeem APS in the event of an unsuccessful remarketing effort at an auction.
Dividends on the APS, which accrue daily, are cumulative at a rate that was established at the offering of the APS and has been reset every seven days thereafter by an auction. During the year ended July 31, 2007, dividend rates on APS ranged as follows: Series M from 4.30% to 6.50%, Series T from 4.00% to 6.50%, Series W from 4.25% to 6.35%, Series TH from 4.15% to 6.50% and Series F from 4.00% to 6.30% . Accrued dividends on APS are included in the value of APS on the Funds Statement of Assets and Liabilities.
During the period ended January 31, 2008, APS of the Fund were successfully remarketed
Semiannual Report | Preferred Income Fund
21
at each remarketing date. All remarketing efforts of APS shares occurring between February 13, 2008 and March 14, 2008 were not successful. As a result, the dividend rates for all series were reset to the maximum, which ranged from 3.84% to 4.34% . Costs of financing the Funds leverage through APS may be higher during times of failed auctions which may negatively impact the Funds common shareholders.
The APS are subject to mandatory redemption at a redemption price equal to $25,000 per share, plus accumulated and unpaid dividends, if the Fund is in default on its asset coverage requirements with respect to the APS, as defined in the Funds bylaws. Under the 1940 Act, the Fund is required to maintain asset coverage of at least 200% with respect to the APS as of the last business day of each month in which the shares are outstanding. If the dividends on the APS shall remain unpaid in an amount equal to two full years dividends, the holders of the APS, as a class, have the right to elect a majority of the Board of Trustees. In general, the holders of the APS and the common shareholders have equal voting rights of one vote per share, except that the holders of the APS, as a class, vote to elect two members of the Board of Trustees, and separate class votes are required on certain matters that affect the respective interests of the APS and common shareholders.
Leverage
The Fund issued preferred shares to increase its assets available for investment. When the Fund leverages its assets, the fees paid to the Adviser for investment advisory and administrative services will be higher than if the Fund did not borrow because the Advisers fees are calculated based on the Funds total assets, including the proceeds of the issuance of preferred shares. Consequently, the Fund and the Adviser may have differing interests in determining whether to leverage the Funds assets.
Leverage creates risks which may adversely affect the return for the holders of common shares, including:
the likelihood of greater volatility of net asset value and market price of common shares
fluctuations in the dividend rates on any preferred shares
increased operating costs, which may reduce the Funds total return to the holders of common shares
the potential for a decline in the value of an investment acquired through leverage, while the Funds obligations under such leverage remains fixed
To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the Funds return will be greater than if leverage had not been used, conversely, return would be lower if the cost of the leverage exceeds the income or capital appreciation derived.
Note 5
Purchases and sales of securities
Purchases and proceeds from sales or maturities of securities, other than short-term securities and obligations of the U.S. government, during the period ended January 31, 2008, aggregated $48,809,053 and $57,831,473, respectively.
The cost of investments owned on January 31, 2008, including short-term investments, for federal income tax purposes was $885,074,310. Gross unrealized appreciation and depreciation of investments aggregated $13,718,080 and $50,276,732, respectively, resulting in net unrealized depreciation of $36,558,652. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to the tax deferral of losses on certain sales of securities and amortization of premiums and accretion of discounts on debt securities.
Preferred Income Fund | Semiannual Report
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Investment objective and policy
The Funds primary objective is to provide a high level of current income, consistent with preservation of capital. The Funds secondary objective is to provide growth of capital to the extent consistent with its primary objective. The Fund seeks to achieve its objectives by investing in a diversified portfolio of securities that, in the opinion of the Adviser, may be undervalued relative to similar securities in the marketplace.
Under normal market conditions, the Fund invests at least: (a) 80% of its assets in preferred stocks and other preferred securities, including convertible preferred securities, (b) 25% of its total assets in the industries comprising the utilities sector and (c) 80% of its total assets in preferred securities or other fixed-income securities, that are rated investment grade or higher by Moodys or Standard & Poors at the time of investment. Assets are defined as net assets, including the liquidation preference of APS, plus borrowing for investment purposes.
Bylaws
On December 16, 2003, the Trustees approved the following change to the Funds bylaws. The auction preferred shares section of the Funds bylaws was changed to update the rating agency requirements in keeping with recent changes to the agencies basic maintenance reporting requirements for leveraged closed-end funds. Bylaws now require an independent accountants confirmation only once per year, at the Funds fiscal year end, and changes to the agencies basic maintenance reporting requirements that include modifications to the eligible assets and their respective discount factors. These revisions bring the Funds bylaws in line with current rating agency requirements.
On September 14, 2004, the Trustees approved an amendment to the Funds bylaws increasing the maximum applicable dividend rate ceiling on the preferred shares to conform with the modern calculation methodology used by the industry and other John Hancock funds.
Dividends and distributions
During the period ended January 31, 2008, dividends from net investment income totaling $0.9300 and distributions from capital gains totaling $0.1530 per share were paid to common shareholders. The dates of payments and amounts per share are as follows:
PAYMENT | INCOME | |
DATE | DIVIDEND | |
|
||
August 31, 2007 | $0.1550 | |
September 28, 2007 | 0.1550 | |
October 31, 2007 | 0.1550 | |
November 30, 2007 | 0.1550 | |
December 31, 2007 | 0.1550 | |
January 31, 2008 | 0.1550 | |
PAYMENT | CAPITAL GAIN | |
DATE | DISTRIBUTION | |
|
||
December 31, 2007 | $0.1530 |
Dividend reinvestment plan
The Fund offers its shareholders a Dividend Reinvestment Plan (the Plan), which offers the opportunity to earn compounded yields. Each holder of common shares will automatically have all distributions of dividends and capital gains reinvested by Mellon Investor Services, as Plan Agent for the common shareholders (the Plan Agent), unless an election is made to receive cash. Holders of common shares who elect not to participate in the Plan will receive all distributions in cash, paid by check and mailed directly to the shareholder of record (or, if the common shares are held in street or other nominee name, then to the nominee) by the Plan Agent, as dividend-disbursing agent. Shareholders whose shares are held in the name of a broker or a nominee should contact the broker or nominee to determine whether and how they may participate in the Plan.
If the Fund declares a dividend payable either in common shares or in cash, non-participants will receive cash and participants in the Plan will receive the equivalent in common shares. If the market price of the common shares on the payment date of the dividend is equal to, or exceeds, their net asset value as determined on the payment date, participants will be issued common shares (out of authorized but unissued shares) at a value equal to the higher of net asset value or 95% of the market price. If the net asset value exceeds the market price of the common shares at such time, or if the Board of Trustees declares a dividend payable only in cash, the Plan Agent will, as agent for Plan participants, buy shares in the open market, on the New
Semiannual Report | Preferred Income Fund
23
York Stock Exchange or elsewhere, for the participants accounts. Such purchases will be made promptly after the payable date for such dividend and, in any event, prior to the next ex-dividend date after such date, except where necessary to comply with federal securities laws. If, before the Plan Agent has completed its purchases, the market price exceeds the net asset value of the common shares, the average per share purchase price paid by the Plan Agent may exceed the net asset value of the common shares, resulting in the acquisition of fewer shares than if the dividend had been paid in shares issued by the Fund.
Each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agents open market purchases in connection with the reinvestment of dividends and distributions. The cost per share of the shares purchased for each participants account will be the average cost, including brokerage commissions, of any shares purchased on the open market, plus the cost of any shares issued by the Fund. There will be no brokerage charges with respect to common shares issued directly by the Fund. There are no other charges to participants for reinvesting dividends or capital gain distributions.
Participants in the Plan may withdraw from the Plan at any time by contacting the Plan Agent by telephone, in writing or by visiting the Plan Agents Web site at www.melloninvestor.com. Such withdrawal will be effective immediately if received not less than 10 days prior to a dividend record date; otherwise, it will be effective for all subsequent dividend record dates.
When a participant withdraws from the Plan or upon termination of the Plan, as provided below, certificates for whole common shares credited to his or her account under the Plan will be issued, and a cash payment will be made for any fraction of a share credited to such account.
The Plan Agent maintains each shareholders account in the Plan and furnishes monthly written confirmations of all transactions in the accounts, including information needed by the shareholders for personal and tax records. The Plan Agent will hold common shares in the account of each Plan participant in non-certificated form in the name of the participant. Proxy material relating to the shareholders meetings of the Fund will include those shares purchased, as well as shares held pursuant to the Plan.
The reinvestment of dividends and distributions will not relieve participants of any federal income tax that may be payable or required to be withheld on such dividends or distributions. Participants under the Plan will receive tax information annually. The amount of dividends to be reported on the 1099-DIV should be: (1) in the case of shares issued by the Fund, the fair market value of such shares on the dividend payment date and (2) in the case of shares purchased by the Plan Agent in the open market, the amount of cash used by the Plan Agent to purchase shares in the open market, including the amount of cash allocated to brokerage commissions paid on such purchases.
Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan as applied to any dividend or distribution paid subsequent to written notice of the change sent to all shareholders of the Fund at least 90 days before the record date for the dividend or distribution. The Plan may be amended or terminated by the Plan Agent after at least 90 days written notice to all shareholders of the Fund. All correspondence or additional information concerning the Plan should be directed to the Plan Agent, Mellon Bank, N.A., c/o Mellon Investor Services, P.O. Box 3338, South Hackensack, NJ 07606-1938 (Telephone: 1-800-852-0218).
Preferred Income Fund | Semiannual Report
24
Shareholder communication
and assistance
If you have any questions concerning the Fund, we will be pleased to assist you. If you hold shares in your own name and not with a brokerage firm, please address all notices, correspondence, questions or other communications regarding the Fund to the transfer agent at:
Mellon Investor Services
Newport Office Center VII
480 Washington Boulevard
Jersey City, NJ 07310
Telephone: 1-800-852-0218
If your shares are held with a brokerage firm, you should contact that firm, bank or other nominee for assistance.
Shareholder meeting (unaudited)
On March 27, 2007, the Annual Meeting of the Fund was held to elect three Trustees.
Proxies covering 23,199,918 shares of beneficial interest were voted at the meeting. The common shareholders elected the following Trustees to serve until their respective successors are duly elected and qualified (there were no current nominees for election by the preferred shareholders), with votes tabulated as follows:
WITHHELD | ||
FOR | AUTHORITY | |
| ||
James R. Boyle | 22,895,380 (common shares) | 304,538 |
Steven R. Pruchansky | 22,904,929 (common shares) | 294,989 |
The preferred shareholders elected Patti McGill Peterson as a Trustee of the Fund until her successor is duly elected and qualified, with the votes tabulated as follows: 10,056 FOR and 55 ABSTAINING.
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25
Board Consideration of and Continuation
of Investment Advisory Agreement and
Subadvisory Agreement: John Hancock
Preferred Income Fund
The Investment Company Act of 1940 (the 1940 Act) requires the Board of Trustees (the Board) of John Hancock Preferred Income Fund (the Fund), including a majority of the Trustees who have no direct or indirect interest in the investment advisory agreement and are not interested persons of the Fund, as defined in the 1940 Act (the Independent Trustees), annually to meet in person to review and consider the continuation of: (i) the investment advisory agreement (the Advisory Agreement) with John Hancock Advisers, LLC (the Adviser) and (ii) the investment subadvisory agreement (the Subadvisory Agreement) with MFC Global Investment Management (U.S.), LLC (the Subadviser). The Advisory Agreement and the Subadvisory Agreement are collectively referred to as the Advisory Agreements.
At meetings held on May 7 and June 45, 2007, the Board considered the factors and reached the conclusions described below relating to the selection of the Adviser and Subadviser and the continuation of the Advisory Agreements. During such meetings, the Boards Contracts/ Operations Committee and the Independent Trustees also met in executive sessions with their independent legal counsel.
In evaluating the Advisory Agreements, the Board, including the Contracts/Operations Committee and the Independent Trustees, reviewed a broad range of information requested for this purpose by the Independent Trustees, including: (i) the investment performance of the Fund and a peer group of comparable funds (the Peer Group) selected by Morningstar, Inc. (Morningstar), an independent provider of investment company data, for a range of periods ended December 31, 2006,1 (ii) advisory and other fees incurred by, and the expense ratios of, the Fund relative to a Peer Group, (iii) the Advisers financial results and condition, including its and certain of its affiliates profitability from services performed for the Fund, (iv) breakpoints in the Funds and the Peer Groups fees and information about economies of scale, (v) the Advisers and Subadvisers record of compliance with applicable laws and regulations, with the Funds investment policies and restrictions, and with the applicable Code of Ethics, and the structure and responsibilities of the Advisers and Subadvisers compliance department, (vi) the background and experience of senior management and investment professionals, and (vii) the nature, cost and character of advisory and non-investment management services provided by the Adviser and its affiliates and by the Subadviser.
The Independent Trustees considered the legal advice of independent legal counsel and relied on their own business judgment in determining the factors to be considered in evaluating the materials that were presented to them and the weight to be given to each such factor. The Boards review and conclusions were based on a comprehensive consideration of all information presented to the Board and not the result of any single controlling factor. They principally considered performance and other information from Morningstar as of December 31, 2006. The Board also considered updated performance information provided to it by the Adviser or Subadviser at the May and June 2007 meetings. Performance and other information may be quite different as of the date of this shareholders report. The key factors considered by the Board and the conclusions reached are described below.
Nature, extent and quality of services
The Board considered the ability of the Adviser and the Subadviser, based on their resources, reputation and other attributes, to attract and retain qualified investment professionals, including research, advisory and supervisory personnel. The Board considered the investment philosophy, research and investment decision-making processes of the Adviser and Subadviser. The Board further considered the culture of compliance, resources dedicated to compliance, compliance programs and compliance records of the Adviser and Subadviser. In addition, the Board took into account the administrative and other non-advisory services provided to the Fund by the Adviser and its affiliates.
Based on the above factors, together with those referenced below, the Board concluded that,
Preferred Income Fund | Semiannual Report
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within the context of its full deliberations, the nature, extent and quality of the investment advisory services provided to the Fund by the Adviser and Subadviser supported renewal of the Advisory Agreements.
Fund performance
The Board considered the performance results for the Fund over various time periods ended December 31, 2006. The Board also considered these results in comparison to the performance of the Peer Group, as well as the Funds benchmark index. Morningstar determined the Peer Group for the Fund. The Board reviewed with a representative of Morningstar the methodology used by Morningstar to select the funds in the Peer Group. The Board noted the imperfect comparability of the Peer Group and that Morningstar was not able to select a comparative Category for the Fund.
The Board recognized the relatively short operational history of the Fund and noted that the Funds performance during the three- and one-year periods was higher than the performance of the median of the Peer Group and its benchmark indexes, the Merrill Lynch Preferred Stock Hybrid Securities Index and Lehman Brothers U.S. Aggregate Index.
Investment advisory fee and subadvisory fee
rates and expenses
The Board reviewed and considered the contractual investment advisory fee rate payable by the Fund to the Adviser for investment advisory services (the Advisory Agreement Rate). The Board received and considered information comparing the Advisory Agreement Rate with the advisory fees for the Peer Group. The Board noted that the Advisory Agreement Rate was lower than the median rate of the Peer Group.
The Board received and considered expense information regarding the Funds various components, including advisory fees, and other non-advisory fees, including administrative fees, transfer agent fees, custodian fees and other miscellaneous fees (e.g., fees for accounting and legal services). The Board considered comparisons of these expenses to the Peer Group median. The Board also received and considered expense information regarding the Funds total operating expense ratio (Gross Expense Ratio) and total operating expense ratio after taking the fee waiver arrangement applicable to the Advisory Agreement Rate into account (Net Expense Ratio). The Board received and considered information comparing the Gross Expense Ratio and Net Expense Ratio of the Fund to that of the Peer Group. The Board noted that the Funds Gross and Net Expense Ratios were lower than the median of the Peer Group.
The Adviser also discussed the Morningstar data and rankings, and other relevant information, for the Fund. Based on the above-referenced considerations and other factors, the Board concluded that the Funds overall performance and expenses supported the re-approval of the Advisory Agreements.
The Board also received information about the investment subadvisory fee rate (the Subadvisory Agreement Rate) payable by the Adviser to the Subadviser for investment sub-advisory services. The Board concluded that the Subadvisory Agreement Rate was fair and equitable, based on its consideration of the factors described here.
Profitability
The Board received and considered a detailed profitability analysis of the Adviser based on the Advisory Agreements, as well as on other relationships between the Fund and the Adviser and its affiliates, including the Subadviser. The Board concluded that, in light of the costs of providing investment management and other services to the Fund, the profits and other ancillary benefits reported by the Adviser were not unreasonable.
Economies of scale
The Board received and considered general information regarding economies of scale with respect to the management of the Fund, including the Funds ability to appropriately benefit from economies of scale under the Funds fee structure. The Board recognized the inherent limitations of any analysis of economies of scale, stemming largely from the Boards understanding that most of the Advisers and Subadvisers costs are not specific to individual Funds, but rather are incurred across a variety of products and services.
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The Board observed that the Advisory Agreements did not offer breakpoints. However, the Board considered the limited relevance of economies of scale in the context of a closed-end fund that, unlike an open-end fund, does not continuously offer its shares. The Board noted that the Fund, as a closed-end investment company, was not expected to increase materially in size and that its assets would grow (if at all) through the investment performance of the Fund. Therefore, the Board did not consider potential economies of scale as a principal factor in assessing the fees payable under the Advisory Agreements, but concluded that the fees were fair and equitable based on relevant factors.
Other benefits to the Adviser
The Board received information regarding potential fall-out or ancillary benefits received by the Adviser and its affiliates as a result of the Advisers relationship with the Fund. Such benefits could include, among others, benefits directly attributable to the relationship of the Adviser with the Fund and benefits potentially derived from an increase in the business of the Adviser as a result of its relationship with the Fund (such as the ability to market to shareholders other financial products offered by the Adviser and its affiliates).
The Board also considered the effectiveness of the Advisers, Subadvisers and Funds policies and procedures for complying with the requirements of the federal securities laws, including those relating to best execution of portfolio transactions and brokerage allocation.
Other factors and broader review
As discussed above, the Board reviewed detailed materials received from the Adviser and Subadviser as part of the annual re-approval process. The Board also regularly reviews and assesses the quality of the services that the Fund receives throughout the year. In this regard, the Board reviews reports of the Adviser and Subadviser at least quarterly, which include, among other things, fund performance reports and compliance reports. In addition, the Board meets with portfolio managers and senior investment officers at various times throughout the year.
After considering the above-described factors and based on its deliberations and its evaluation of the information described above, the Board concluded that approval of the continuation of the Advisory Agreements for the Fund was in the best interest of the Fund and its shareholders. Accordingly, the Board unanimously approved the continuation of the Advisory Agreements.
1 Morningstar also provided a comparative analysis for most, but not all, of the John Hancock Funds of the investment performance and advisory and other fees incurred by, and the expense ratios of, the John Hancock Funds relative to a category of relevant funds (the Category). Morningstar was not able to select a comparative Category for the John Hancock Preferred Income Fund. Therefore, Morningstar did not provide such an analysis.
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For more information
The Funds proxy voting policies, procedures and records are available without charge, upon request:
By phone | On the Funds Web site | On the SECs Web site |
1-800-225-5291 | www.jhfunds.com/proxy | www.sec.gov |
| ||
Trustees | Charles A. Rizzo | Transfer agent for |
James F. Carlin, Chairman | Chief Financial Officer | common shareholders |
James R. Boyle | Mellon Investor Services | |
William H. Cunningham | Gordon M. Shone | Newport Office Center VII |
Charles L. Ladner* | Treasurer | 480 Washington Boulevard |
Dr. John A. Moore* | Jersey City, NJ 07310 | |
Patti McGill Peterson* | John G. Vrysen | |
Steven R. Pruchansky | Chief Operating Officer | Transfer agent for |
*Members of the Audit Committee | preferred shareholders | |
Non-Independent Trustee | Investment adviser | Deutsche Bank Trust |
John Hancock Advisers, LLC | Company Americas | |
Officers | 601 Congress Street | 280 Park Avenue |
Keith F. Hartstein | Boston, MA 02210-2805 | New York, NY 10017 |
President and | ||
Chief Executive Officer | Subadviser | Legal counsel |
MFC Global Investment | Kirkpatrick & Lockhart | |
Thomas M. Kinzler | Management (U.S.), LLC | Preston Gates Ellis LLP |
Secretary and Chief Legal Officer | 101 Huntington Avenue | One Lincoln Street |
Boston, MA 02199 | Boston, MA 02111-2950 | |
Francis V. Knox, Jr. | ||
Chief Compliance Officer | Custodian | Stock symbol |
The Bank of New York | Listed New York Stock | |
One Wall Street | Exchange: HPI | |
New York, NY 10286 | ||
For shareholder assistance refer | ||
to page 25. | ||
How to contact us | ||
| ||
Internet | www.jhfunds.com | |
| ||
Mellon Investor Services | ||
Newport Office Center VII | ||
480 Washington Boulevard | ||
Jersey City, NJ 07310 | ||
| ||
Phone | Customer service representatives | 1-800-852-0218 |
Portfolio commentary | 1-800-344-7054 | |
24-hour automated information | 1-800-843-0090 | |
TDD line | 1-800-231-5469 | |
|
A listing of month-end portfolio holdings is available on our Web site, www.jhfunds.com. A more detailed portfolio holdings summary is available on a quarterly basis 60 days after the fiscal quarter on our Web site or upon request by calling 1-800-225-5291, or on the SECs Web site, www.sec.gov.
Semiannual Report | Preferred Income Fund
29
1-800-852-0218
1-800-843-0090 EASI-Line
1-800-231-5469 TDD
www.jhfunds. com
PRESORTED
STANDARD
U.S. POSTAGE
PAID
MIS
P80SA | 1/08 |
3/08 |
ITEM 2. CODE OF ETHICS.
As of the end of the period, January 31, 2008, the registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, that applies to its Chief Executive Officer, Chief Financial Officer and Treasurer (respectively, the principal executive officer, the principal financial officer and the principal accounting officer, the Senior Financial Officers). A copy of the code of ethics is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable at this time.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable at this time.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable at this time.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to previously disclosed John Hancock Funds Governance Committee Charter.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's principal executive officer and principal financial officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-
year in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) Separate certifications for the registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
(b) Separate certifications for the registrant's principal executive officer and principal financial officer, as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule 30a-2(b) under the Investment Company Act of 1940, are attached. The certifications furnished pursuant to this paragraph are not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certifications are not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates them by reference.
(c)(1) Submission of Matters to a Vote of Security Holders is attached. See attached John Hancock Funds - Governance Committee Charter.
(c)(2) Contact person at the registrant.
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.
John Hancock Preferred Income Fund
By: /s/ Keith F. Hartstein
-------------------------------------
Keith F. Hartstein
President and Chief Executive Officer
Date: March 31, 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: /s/ Keith F. Hartstein
-------------------------------------
Keith F. Hartstein
President and Chief Executive Officer
Date: March 31, 2008
By: /s/ Charles A. Rizzo
-------------------------------------
Charles A. Rizzo
Chief Financial Officer
Date: March 31, 2008