Prospectus
December 30, 1999, as
revised September 30, 2000
Putnam High Yield Trust II
Class Y shares
Investment Category: Income
This prospectus explains what you should know about this mutual fund before
you invest. Please read it carefully.
Putnam Investment Management, Inc. (Putnam Management), which has managed
mutual funds since 1937, manages the fund.
These securities have not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the accuracy or
adequacy of this prospectus. Any statement to the contrary is a crime.
CONTENTS
2 Fund summary
2 Goal
2 Main investment strategies
2 Main risks
3 Performance information
4 Fees and expenses
4 What are the fund's main investment strategies and related risks?
7 Who manages the fund?
8 How does the fund price its shares?
8 How do I buy fund shares?
9 How do I sell fund shares?
10 How do I exchange fund shares?
10 Fund distributions and taxes
Putnam Defined Contribution Plans
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Fund summary
GOAL
The fund seeks high current income. Capital growth is a secondary goal when
consistent with achieving high current income.
MAIN INVESTMENT STRATEGIES -- LOWER-RATED BONDS
We mainly invest in bonds that
* are obligations of U.S. corporations,
* are below investment grade in quality (junk bonds), and
* have intermediate- to long-term maturities (three years or longer).
MAIN RISKS
The main risks that could adversely affect the value of the fund's shares
and the total return on your investment include:
* The risk that issuers of the fund's investments will not make timely
payments of interest and principal. This credit risk is higher for debt
that is below investment grade in quality. Because the fund invests mainly
in junk bonds, this risk is heightened for the fund. Investors should
carefully consider the risks associated with an investment in the fund.
* The risk that movements in the securities markets will adversely affect
the value of the fund's investments. This risk includes interest rate
risk, which means that the prices of the fund's investments are likely to
fall if interest rates rise. Interest rate risk is generally highest for
investments with long maturities.
You can lose money by investing in the fund. The fund may not achieve its
goals, and is not intended as a complete investment program. An investment
in the fund is not a deposit in a bank and is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE INFORMATION
The following chart provides some indication of the fund's risks by showing
year-to-year changes in the performance of the fund's class Y shares. The
table following the chart compares the fund's performance to that of a
broad measure of market performance. Of course, a fund's past performance
is not an indication of future performance.
[GRAPHIC OMITTED: vertical bar chart CALENDAR YEAR TOTAL RETURNS]
CALENDAR YEAR TOTAL RETURNS
Plot points
1998 0.20%
Year-to-date performance through 9/30/99 was 1.67%. During the periods
shown in the bar chart, the highest return for a quarter was 8.00% (quarter
ending 3/31/98) and the lowest return for a quarter was -8.49% (quarter
ending 9/30/98).
Performance of class Y shares, which were not in existence during the
periods shown in the bar chart and table following the chart, was derived
from the historical performance of the fund's class A shares (not offered
by this prospectus). Performance of class Y shares prior to their inception
does not reflect the initial sales charge currently applicable to class A
shares or differences in operating expenses which, for class Y shares, are
lower than the operating expenses applicable to class A shares.
Average Annual Total Returns (for periods ending 12/31/98)
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Since
Past inception
1 year (12/31/97)
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Class Y -4.52% -4.52%
First Boston High Yield Index 0.58% 0.58%
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The fund's performance through 8/31/98 benefited from Putnam Management's
agreement (since inception) to limit the fund's expenses. The fund's
performance is compared to the First Boston High Yield Index, an unmanaged
index that is market-weighted and includes publicly-traded bonds having a
rating below BBB by Standard & Poor's and Baa by Moody's.
FEES AND EXPENSES
This table summarizes the fees and expenses you may pay if you invest in
class Y shares of the fund. Expenses are based on the fund's last fiscal
year.
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Annual Fund Operating Expenses (expenses that are deducted from fund assets)
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Total Annual
Management Other Fund Operating
Fees Fees Expenses
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0.63% 0.18% 0.81%
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EXAMPLE
The example translates the expenses shown in the preceding table into
dollar amounts. By doing this, you can more easily compare the cost of
investing in the fund to the cost of investing in other mutual funds. The
example makes certain assumptions. It assumes that you invest $10,000 in
the fund for the time periods shown and then redeem all your shares at the
end of those periods. It also assumes a 5% return on your investment each
year and that the fund's operating expenses remain the same. The example is
hypothetical; your actual costs and returns may be higher or lower.
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1 year 3 years 5 years 10 years
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Class Y $83 $259 $450 $1,002
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What are the fund's main investment strategies and related risks?
Any investment carries with it some level of risk that generally reflects
its potential for reward. We pursue the fund's goal by investing mainly in
lower-rated bonds. These investments are commonly known as fixed-income
investments. We will consider, among other things, credit, interest rate
and prepayment risks as well as general market conditions when deciding
whether to buy or sell investments. A description of the risks associated
with the fund's main investment strategies follows.
* Interest rate risk. The values of bonds and other debt usually rise and
fall in response to changes in interest rates. Declining interest rates
generally raise the value of existing debt instruments, and rising interest
rates generally lower the value of existing debt investments. Changes in a
debt instrument's value usually will not affect the amount of income the
fund receives from it, but will affect the value of the fund's shares.
Interest rate risk is generally greater for investments with longer
maturities.
Some investments give the issuer the option to call, or redeem, these
investments before their maturity date. If an issuer "calls" its security
during a time of declining interest rates, we might have to reinvest the
proceeds in an investment offering a lower yield, and therefore might not
benefit from any increase in value as a result of declining interest rates.
"Premium investments" offer interest rates higher than prevailing market
rates. However, they involve a greater risk of loss, because their values
tend to decline over time. You may find it useful to compare the fund's
yield, which factors out the effect of premium investments, with its
current dividend rate, which does not factor out that effect.
* Credit risk. Investors normally expect to be compensated in proportion
to the risk they are assuming. Thus, debt of issuers with poor credit
prospects usually offers higher yields than debt of issuers with more
secure credit. Higher-rated investments generally offer lower credit risk.
We invest mostly in higher-yielding, higher-risk debt investments that are
rated below BBB or its equivalent at the time of purchase by a nationally
recognized rating agency rating such investments, or are unrated
investments that we think are of comparable quality. We may buy
investments in any category, and may invest up to 15% of the fund's assets
in investments rated, at the time of purchase, below CCC (or its
equivalent) by each rating agency rating such investments, and unrated
investments that we think are of comparable quality. We will not
necessarily sell an investment if its rating is reduced after we buy it.
Investments rated below BBB or its equivalent are known as "junk bonds."
They reflect a greater possibility that the issuers may be unable to make
timely payments of interest and principal and thus default. If this
happens, or is perceived as likely to happen, the values of those
investments will usually be more volatile. A default or expected default
could also make it difficult for us to sell the investments at prices
approximating the values we had previously placed on them. Lower-rated
debt usually has a more limited market than higher-rated debt, which may at
times make it difficult for us to buy or sell certain debt instruments or
to establish their fair value. Credit risk is generally greater for
investments that are issued at less than their face value and make payments
of interest only at maturity rather than at intervals during the life of
the investment.
Credit ratings are based largely on the issuer's historical financial
condition and the rating agencies' investment analysis at the time of
rating. The rating assigned to any particular investment does not
necessarily reflect the issuer's current financial condition, and does not
reflect an assessment of an investment's volatility or liquidity.
Although we consider credit ratings in making investment decisions, we
perform our own investment analysis and do not rely only on ratings
assigned by the rating agencies. The fund depends more on our ability in
buying lower-rated debt than it does in buying investment-grade debt.
We may have to participate in legal proceedings or to take possession of
and manage assets that secure the issuer's obligations. This could
increase the fund's operating expenses and decrease its net asset value.
Although investment-grade investments generally have lower credit risk,
they may share some of the risks of lower-rated investments.
* Foreign investments. We may invest in securities of foreign issuers.
Foreign investments involve certain special risks. For example, their
values may decline in response to changes in currency exchange rates,
unfavorable political and legal developments, unreliable or untimely
information, or economic and financial instability. In addition, the
liquidity of these investments may be more limited than domestic
investments, which means we may at times be unable to sell them at
desirable prices. Foreign settlement procedures may also involve
additional risks. These risks are generally greater in the case of
developing (also know as emerging) markets that typically have less
developed legal and financial systems.
Certain of these risks may also apply to some extent to domestic
investments that are denominated in foreign currencies or that are traded
in foreign markets, or to investments in U.S. companies that have
significant foreign operations.
* Illiquid investments. We may invest up to 15% of the fund's assets in
illiquid investments, which may be considered speculative. The sale of
many of these investments is limited by law. We may not be able to
sell the fund's illiquid investments when we consider it is desirable
to do so or we may be able to sell them only at less than their market
value.
* Frequent trading. We may buy or sell investments relatively often,
which involves higher brokerage commissions, and may increase the amount
of taxes payable by shareholders.
* Other investments. In addition to the main investment strategies described
above, we may also make other types of investments, such as investments in
derivatives, including futures, options, warrants and swap contracts,
equity securities and assignments, and participants of fixed and floating
rate loans, and may be subject to other risks, as described in the fund's
statement of additional information (SAI).
* Alternative strategies. At times we may judge that market conditions make
pursuing the fund's usual investment strategies inconsistent with the best
interests of the fund's shareholders. We then may temporarily use
alternative strategies that are mainly designed to limit losses. However,
we may choose not to use these strategies for a variety of reasons, even in
very volatile market conditions. These strategies may cause the fund to
miss out on investment opportunities, and may prevent the fund from
achieving the fund's goal.
* Changes in policies. The fund's Trustees may change the fund's goal,
investment strategies and other policies without shareholder approval,
except as otherwise indicated.
Who manages the fund?
The fund's Trustees oversee the general conduct of the fund's business. The
Trustees have retained Putnam Management to be the fund's investment
manager, responsible for making investment decisions for the fund and
managing the fund's other affairs and business. The fund pays Putnam
Management a quarterly management fee for these services based on the
fund's average net assets. The fund paid Putnam Management a management fee
of 0.63% of average net assets for the fund's last fiscal year. Putnam
Management's address is One Post Office Square, Boston, MA 02109.
The following officers of Putnam Management have had primary responsibility
for the day-to-day management of the fund's portfolio since the years shown
below. Their experience as portfolio managers or investment analysts over
at least the last five years is also shown.
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Manager Since Experience
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Jennifer E. Leichter 1998 1987 - Present Putnam Management
Managing Director
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Jeffrey A. Kaufman 1997 1998 - Present Putnam Management
Senior Vice President Prior to August 1998 MFS Investment Management
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How does the fund price its shares?
The price of the fund's shares is based on its net asset value (NAV). The
NAV per share of each class equals the total value of its assets, less its
liabilities, divided by the number of its outstanding shares. Shares are
only valued as of the close of regular trading on the New York Stock
Exchange each day the exchange is open.
The fund values its investments for which market quotations are readily
available at market value. It values short-term investments that will
mature within 60 days at amortized cost, which approximates market value.
It values all other investments and assets at their fair value.
The fund translates prices for its investments quoted in foreign currencies
into U.S. dollars at current exchange rates. As a result, changes in the
value of those currencies in relation to the U.S. dollar may affect the
fund's NAV. Because foreign markets may be open at different times than the
New York Stock Exchange, the value of the fund's shares may change on days
when shareholders are not able to buy or sell them. If events materially
affecting the values of the fund's foreign investments occur between the
close of foreign markets and the close of regular trading on the New York
Stock Exchange, these investments will be valued at their fair value.
How do I buy fund shares?
All orders to purchase shares must be made through your employer's
retirement plan. For more information about how to purchase shares of the
fund through your employer's plan or limitations on the amount that may be
purchased, please consult your employer.
Putnam Retail Management, Inc. (Putnam Retail Management) generally must
receive your plan's completed buy order before the close of regular trading
on the New York Stock Exchange for shares to be bought at that day's
offering price.
To eliminate the need for safekeeping, the fund will not issue certificates
for shares.
The fund may periodically close to new purchases of shares or refuse any
order to buy shares if Putnam Management determines that doing so would be
in the best interests of the fund and its shareholders.
Eligible purchasers. A defined contribution plan (including a corporate
IRA) is eligible to purchase class Y shares if
* the plan, its sponsor and other employee benefit plans of the sponsor
invest at least $150 million in Putnam funds and other investments managed
by Putnam Management or its affiliates, or
* the plan's sponsor confirms a good faith expectation that investments in
Putnam-managed assets by the sponsor and its employee benefit plans will
attain $150 million (using the higher of purchase price or current market
value) within one year of initial purchase, and agrees that class Y shares
may be redeemed and class A shares purchased if that level is not attained.
College savings plans that qualify under Section 529 of the Internal
Revenue Code are also eligible to purchase class Y shares.
How do I sell fund shares?
Subject to any restrictions imposed by your employer's plan, you can sell
your shares through the plan back to the fund any day the New York Stock
Exchange is open. For more information about how to sell shares of the fund
through your employer's plan, including any charges that the plan may
impose, please consult your employer.
Your plan administrator must send a signed letter of instruction to Putnam
Investor Services. The price you will receive is the next NAV per share
calculated after the fund receives the instruction in proper form. In order
to receive that day's NAV, Putnam Investor Services must receive the
instruction before the close of regular trading on the New York Stock
Exchange.
The fund generally sends payment for your shares the business day after
your request is received. Under unusual circumstances, the fund may suspend
redemptions, or postpone payment for more than seven days, as permitted by
federal securities law.
How do I exchange fund shares?
Subject to any restrictions your plan imposes, you can exchange your fund
shares for shares of other Putnam funds offered through your employer's
plan without a sales charge. Contact your plan administrator or Putnam
Investor Services for more information.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and
have an adverse effect on all shareholders. In order to limit excessive
exchange activity and otherwise to promote the best interests of the fund,
the fund reserves the right to revise or terminate the exchange privilege,
limit the amount or number of exchanges or reject any exchange. The fund
into which you would like to exchange may also reject your exchange. These
actions may apply to all shareholders or only to those shareholders whose
exchanges Putnam Management determines are likely to have a negative effect
on the fund or other Putnam funds.
Fund distributions and taxes
The fund will declare a distribution each day in an amount which is based
on Putnam Management's projections of the fund's estimated net investment
income. Normally, the fund distributes any net investment income once a
month and any net realized capital gains at least once a year.
The terms of your employer's plan will govern how your employer's plan may
receive distributions from the fund. Generally, periodic distributions from
the fund to your employer's plan are reinvested in additional fund shares,
although your employer's plan may permit you to receive fund distributions
from net investment income in cash while reinvesting capital gains
distributions in additional shares or to receive all fund distributions in
cash. If you do not select another option, all distributions will be
reinvested in additional fund shares.
Generally, for federal income tax purposes, fund distributions are taxable
as ordinary income, except that any distributions of long-term capital
gains will be taxed as such regardless of how long you have held your
shares. However, distributions by the fund to retirement plans that qualify
for tax-exempt treatment under federal income tax laws will not be taxable.
Special tax rules apply to investments through such plans. You should
consult your tax advisor to determine the suitability of the fund as an
investment through such a plan and the tax treatment of distributions
(including distributions of amounts attributable to an investment in the
fund) from such a plan.
You should consult your tax advisor for more information on your own tax
situation, including possible foreign, state and local taxes.
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For more information about Putnam
High Yield Trust II
The fund's statement of additional information (SAI) and annual and
semi-annual reports to shareholders include additional information about
the fund. The SAI, and the auditor's report and financial statements
included in the fund's most recent annual report to its shareholders, are
incorporated by reference into this prospectus, which means they are part
of this prospectus for legal purposes. The fund's annual report discusses
the market conditions and investment strategies that significantly affected
the fund's performance during its last fiscal year. You may get free copies
of these materials, request other information about the fund and other
Putnam funds, or make shareholder inquiries, or by calling Putnam toll-free
at 1-800-752-9894.
You may review and copy information about the fund, including its SAI, at
the Securities and Exchange Commission's public reference room in
Washington, D.C. You may call the Commission at 1-202-942-8090 for
information about the operation of the public reference room. You may also
access reports and other information about the fund on the EDGAR Database
on the Commission's Internet site at http://www.sec.gov. You may get copies
of this information, with payment of a duplication fee, by electronic
request at the following E-mail address: [email protected], by writing the
Commission's Public Reference Section, Washington, D.C. 20549-0102. You may
need to refer to the fund's file number.
PUTNAM INVESTMENTS
Putnam Defined Contribution Plans
One Post Office Square
Boston, Massachusetts 02109
1-800-752-9894
Address correspondence to
Putnam Investor Services
P.O. Box 9740
Providence, Rhode Island 02940-9740
www.putnaminvestments.com
File No: 811-7513
Putnam High Yield Trust II (a series of Putnam Funds Trust)
