Putnam
Europe
Growth
Fund
ANNUAL REPORT
June 30, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar, an independent rating agency, gave the fund's class A
shares its highest ranking of 5 stars for overall performance as of June
30, 1998 (based on the fund's average annual returns for the 3- and 5-year
periods). This rating put the fund among 10% of the 778 international
equity funds rated.*
* Putnam Europe Growth Fund's class A shares were ranked in the top 18%
by Lipper Analytical Services for the 5-year period ended June 30, 1998. The
fund ranked 4 out of 22 European funds ranked.+
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
18 Financial statements
* Morningstar ratings reflect risk-adjusted performance through 6/30/98
and are subject to change every month. Morningstar ratings are calculated
from a fund's 3-, 5-, and 10-year returns (with fee adjustments) in excess
of 90-day Treasury bill returns and a risk factor that reflects
performance below 90-day Treasury bill returns. For both 3- and 5-year
performance, the fund received 5 stars. There were 778 and 338
international equity funds rated, respectively, 10% of the funds in an
investment category receive 5 stars. Performance of other share classes
will vary. Past performance is not indicative of future results.
+ Lipper is an industry research firm whose rankings are based on total
return performance, vary over time, and do not reflect the effects of
sales charges. The fund's class A shares ranked 32 out of 82 European
funds for 1-year performance as of 6/30/98. Performance of other share
classes will vary. Past performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The management of Putnam Europe Growth Fund combined astute stock selection
with carefully calculated country weightings to take advantage of a number of
attractive equity investments during the fiscal year ended June 30, 1998. The
result was another period of positive performance, earning the fund high
rankings from mutual fund research organizations, as noted in the Fund
Highlights on the facing page.
These results reflect favorably on a management team with considerable
experience in European equity markets. This time-tested experience ought
to serve the management team well as Europe greets the arrival of
Economic and Monetary Union and its new euro early next year.
In the following report, the team reviews fiscal 1998 performance and
provides some insights into prospects for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
August 19, 1998
Report from the Fund Managers
Mark D. Pollard
Justin M. Scott
Omid Kamshad
The past year has offered an exceptionally profitable environment for
investors in European equity markets. As the portfolio managers of Putnam
Europe Growth Fund, we were able to take advantage of numerous attractive
opportunities.
Our process of selecting companies with a combination of compelling valuations
and reasonably predictable earnings growth allowed your fund's class A shares
to post a total return of 35.22% at net asset value (27.42% at public offering
price) for the fiscal year ended June 30, 1998, as well as maintain an
attractive long-term record relative to its peers (see page 2). Results for
other share classes and longer periods can be found on page 9.
* BALANCING BROAD ECONOMIC TRENDS WITH RIGOROUS INDUSTRY AND COMPANY ANALYSIS
A key element of our management approach is balancing the variety of
macroeconomic environments within Europe against opportunities uncovered
by our in-depth industry and company analysis.
One attractive industry that scores well on both counts is telecommunications,
where strong growth expectations were steadily revised upward during the
period. These revisions reflected the boom in cellular subscribers;
liberalization, which created product innovation and boosted volumes; and
strong growth in Internet usage, which, unlike the U.S. business model,
actually generates revenues in Europe.
Deutsche Telekom, which dominates the public telecommunications networks in
Germany, turned in a strong performance in the spring after a slow start to
the year. Mannesmann, also of Germany, is successfully restructuring itself
from an engineering group into a fixed and mobile telecom operator, and is
also one of the fund's stronger performers.
Elsewhere, Vivendi (formerly Generale des Eaux) has streamlined itself to
realize an increasing amount of value from its fast-growing fixed and mobile
telecom operations in France. Finally, world-leading telecom equipment
manufacturers Nokia of Finland and Ericsson of Sweden continued to perform
well for the fund. While these holdings, along with others discussed in this
report, were viewed favorably at the end of the fiscal period, all are subject
to review and adjustment in accordance with the fund's investment strategy and
may vary in the future.
Broad trends -- such as the strengthening economies and falling interest rates
of peripheral European markets like Ireland, Portugal, Spain, and the
Netherlands prior to the formation of the Economic and Monetary Union (EMU) --
benefited the fund. In general, the growth rates in these countries remain
significantly higher than those found in the core countries such as France and
Germany. However, after significant price appreciation in some of these
markets, we have to consider current valuations carefully. In places such as
Portugal, we've taken profits on several stocks that we considered overvalued
after sharp upward moves.
While Continental Europe performed well, the United Kingdom has been
disappointing. The economy has slowed as a result of the strong pound -- which
has hurt exporters and has forced manufacturers into a technical recession --
and higher interest rates relative to the rest of Europe. These developments
persuaded us to reduce our U.K. exposure from its previously higher levels
earlier this period in favor of companies on the Continent. Unfortunately some
of our remaining holdings, such as diversified industrial companies BTR and
Tomkins, performed poorly.
[GRAPHIC OMITTED: horizontal bar chart of TOP COUNTRY ALLOCATIONS]
TOP COUNTRY ALLOCATIONS*
United Kingdom 25.9%
France 16.5%
Netherlands 10.6%
Germany 10.1%
Switzerland 9.1%
Footnote reads:
* Based on net assets as of 6/30/98. Holdings will vary over time.
* SEEKING CONSISTENT, LONG-TERM PERFORMANCE
Risk management and a goal of consistent long-term performance have long been
driving forces behind the management of your fund. This strategy leads us to
take profits -- as we did in some peripheral European markets -- and to
consider outside factors such as the financial and economic problems in Asia.
For example, we targeted consumer cyclical companies that benefited from
economic recovery in Europe and would not be unduly hurt by the developments
in Asia. French-based Lafarge, which has extensive cement and ready-mix
concrete operations across Europe, benefited from increasing signs of higher
European growth. Additionally, Lafarge has the advantage of being a strong
player in a business that does not face pricing pressure from Asian imports.
Automobile manufacturers also benefited from a stronger European economy that
spurred higher new car registrations. The anticipation of consolidation in the
auto industry brought on largely by the Daimler-Chrysler merger announcement
added further to the returns of auto stocks. Volvo and BMW remain likely
merger candidates -- although not necessarily with each other. This is due to
the strength of their particular business niches but relatively small size in
an industry in which economies of scale have become increasingly important.
While risks associated with the Asian situation led us away from certain
companies, the fund continues to hold HSBC -- which is dual listed in London
and Hong Kong and has, in our opinion, been unfairly hurt by its Asian
connections. HSBC is a very well-managed institution that ranks among the
world's largest and most successful banks. The company has significant
businesses in the United Kingdom, Canada, and Brazil in addition to Hong Kong.
Given HSBC's inherent strength, we believe it could be well positioned to
actually take advantage of the downturn in the Asian economies and buy
additional Asian operations at low prices.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Nestle S.A. (Switzerland)
Food and beverages
Vivendi (France)
Environmental control
Internationale Nederlanden Groep (Netherlands)
Insurance and finance
UBS AG (Switzerland)
Banking
Novartis AG ADR (Switzerland)
Pharmaceuticals
Mannesmann AG (Germany)
Business equipment and services
Akzo-Nobel N.V. (Netherlands)
Chemicals
Philips Electronics N.V. (Netherlands)
Electronics and electrical equipment
Allied Irish Banks PLC (Ireland)
Insurance and finance
Scottish Power PLC (United Kingdom)
Utilities
These holdings represent 22.0% of the fund's net assets as of 6/30/98.
Portfolio holdings will vary over time.
* OTHER AREAS OF OPPORTUNITY
Banking and financial companies have benefited for some time from the
favorable interest-rate environment in Europe. We were particularly encouraged
by the shift from traditional bank lending activity to profitable fee-based
businesses such as asset management and securities trading. Additionally, we
believe the consolidation in European banking is still in its early stages and
will continue following the EMU. Two of the fund's top 10 holdings reflect
these trends: Union Bank of Switzerland (UBS) and Internationale Nederlanden
Groep (ING) of the Netherlands.
We have also devoted a small portion of the fund's holdings to developing
European countries such as Greece and Poland. In Greece, we targeted the newly
privatized telecommunications operator Hellenic Telecom Organization and
cellular operator STET Hellas, another recent privatization. In Poland, our
principal holding is Bank Handlowy, one of the largest and strongest
franchises in the country, as well as several smaller banks including Bank
Slaski, a subsidiary of ING, and Wielkopolski Bank Kredytowy (WBK), a unit of
Allied Irish Banks.
*OUTLOOK REMAINS POSITIVE
This past May, 11 European countries were officially selected for membership
to the EMU, which is set to begin in January 1999. EMU offers potential
advantages such as more competitive companies, broader and more liquid
financial markets, lower interest rates, and stable exchange rates. It is also
acting as a catalyst for change throughout the region.
Overall our outlook for Europe -- especially Continental Europe -- remains
positive. While we cannot expect returns to continue to accrue at the pace
we've experienced in the past year, the combination of low interest rates,
lower budget deficits, significant corporate restructuring, positive earnings
revisions, and good valuations should continue to make European markets
especially attractive in comparison to those of other regions.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 6/30/98, there is no guarantee the fund will continue to hold
these securities in the future. International investing involves certain
risks, including economic instability, political developments, and currency
fluctuations, not present with U.S. investments. Funds investing in a single
sector may be subject to more volatility than those investing in a diverse
group of sectors.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Europe Growth Fund is designed for investors seeking capital appreciation
through investments primarily in common stocks and other securities of
European companies.
TOTAL RETURN FOR PERIODS ENDED 6/30/98
Class A Class B Class M
(inception date) (9/7/90) (2/1/94) (12/1/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 35.22% 27.42% 34.26% 29.26% 34.56% 29.87%
- ------------------------------------------------------------------------
5 years 195.45 178.47 184.90 182.90 189.73 179.58
Annual average 24.19 22.73 23.29 23.12 23.71 22.83
- ------------------------------------------------------------------------
Life of fund 268.18 246.96 247.05 247.05 255.26 242.65
Annual average 18.16 17.27 17.27 17.27 17.62 17.08
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 6/30/98
MSCI Europe Consumer
Index Price Index
- ------------------------------------------------------------------------
1 year 37.06% 1.68%
- ------------------------------------------------------------------------
5 years 181.23 12.88
Annual average 22.98 2.45
- ------------------------------------------------------------------------
Life of fund 212.99 23.86
Annual average 15.69 2.77
- ------------------------------------------------------------------------
Past performance is not indicative of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
5.75% and 3.50%, respectively. Class B share returns for the 1-, 5-year
(where available) and life-of-fund periods reflect the applicable contingent
deferred sales charge (CDSC), which is 5% in the first year, declines
to 1% in the sixth year, and is eliminated thereafter. Returns shown for
class B and class M shares for periods prior to their inception are derived
from the historical performance of class A shares, adjusted to reflect
both the initial sales charge or CDSC, if any, currently applicable to
each class and, in the case of class B and class M shares, the higher
operating expenses applicable to such shares. All returns assume
reinvestment of distributions at NAV. Investment return and principal
value will fluctuate so that an investor's shares when redeemed may be
worth more or less than their original cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
9/7/90
Fund's class A MSCI Europe Consumer Price
Date shares at POP Index Index
9/90 9,424 10,000 10,000
6/91 9,792 9,318 10,334
6/92 11,662 11,415 10,643
6/93 11,743 11,129 10,973
6/94 14,027 12,895 11,246
6/95 16,950 15,317 11,588
6/96 19,970 17,565 11,907
6/97 25,659 22,833 12,181
6/98 $34,696 $31,299 $12,386
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have been
valued at $34,705 and no contingent deferred sales charges would apply; a
$10,000 investment in the fund's class M shares would have been valued at
$35,526 at net asset value ($34,265 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 6/30/98
Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 1 1 1
- ------------------------------------------------------------------------
Income $0.373 $0.265 $0.298
- ------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------
Long-term 0.826 0.826 0.826
- ------------------------------------------------------------------------
Short-term 0.303 0.303 0.303
- ------------------------------------------------------------------------
Total $1.502 $1.394 $1.427
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
6/30/97 $18.96 $20.12 $18.56 $18.85 $19.53
- ------------------------------------------------------------------------
6/30/98 23.68 25.12 23.11 23.51 24.36
- ------------------------------------------------------------------------
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance figures
shown here assume the maximum 5.75% sales charge for class A shares and
3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
Morgan Stanley Capital International Europe Index (MSCI) is an unmanaged
list of approximately 627 equity securities originating in one of the 15
European countries, with all values expressed in U.S. dollars. The index
assumes reinvestment of all distributions and dividend payments and does
not take into account brokerage fees or taxes. Securities in the fund do
not match those in the index and performance of the fund will differ. It
is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
For the fiscal year ended June 30, 1998
To the Trustees and Shareholders of
Putnam Europe Growth Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam Europe
Growth Fund (the "fund") at June 30, 1998, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at June 30, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 17, 1998
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Strategic Income Fund *
High Quality Bond Fund +
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER]Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to maintain a
price of $1.00 per share, although there is no assurance that this price
will be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Portfolio of investments owned
June 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS (96.6%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Austria (1.1%)
- -------------------------------------------------------------------------------------------------------------
92,667 Erste Bank $ 5,611,323
24,440 EVN Energie-Versorgung Niederoesterreich AG 3,652,450
54,533 VA Technolgies AG 6,775,884
--------------
16,039,657
Denmark (0.7%)
- -------------------------------------------------------------------------------------------------------------
38,365 Sydbank AS 2,135,260
91,293 Unidanmark AS 8,198,659
--------------
10,333,919
Finland (1.8%)
- -------------------------------------------------------------------------------------------------------------
47,896 Huhtamaki I Free 2,737,961
326,955 Oy Nokia AB Class A 24,017,613
--------------
26,755,574
France (16.5%)
- -------------------------------------------------------------------------------------------------------------
188,409 AGF (Assurances Generales de France) 10,636,970
34,654 Alcatel Alsthom S.A. 7,040,032
294,839 Banque Nationale de Paris 24,036,714
89,090 Credit Commercial de France 7,483,589
153,029 Elf Aquitaine S.A. 21,466,235
96,351 Lafarge Coppee 9,938,011
404,861 Michelin Corp. Class B 23,318,177
40,622 Peugeot Citroen S.A. 8,715,010
170,989 Renault S.A. (NON) 9,704,285
243,793 SCOR 15,429,428
121,949 Societe Generale 25,297,449
167,781 STMicroelectronics N.V. 11,864,702
96,744 STMicroelectronics N.V.-N.Y. (NON) 6,759,987
167,980 Total S.A. Class B 21,789,303
11,767 Union des Assurances Federales 1,850,640
171,323 Vivendi 36,501,031
--------------
241,831,563
Germany (10.1%)
- -------------------------------------------------------------------------------------------------------------
27,153 Allianz Versicherungs AG (NON) 9,034,727
193,508 Bayer AG ADR (NON) 9,999,252
17,353 Bayerische Motoren Werke (BMW) AG 17,467,021
260,236 Deutsche Bank AG 21,970,685
535,765 Deutsche Lufthansa AG 13,471,933
473,180 Deutsche Telekom AG 12,932,278
293,120 Mannesmann AG 30,082,302
17,909 Munich Re 8,877,712
146,239 Veba AG 9,818,038
15,020 Volkswagon AG (NON) 14,484,018
--------------
148,137,966
Greece (1.2%)
- -------------------------------------------------------------------------------------------------------------
471,707 Hellenic Telecommunication Organization S.A. 12,079,962
123,982 STET Hellas Telecommunications S.A. (NON) 5,145,253
--------------
17,225,215
Ireland (4.4%)
- -------------------------------------------------------------------------------------------------------------
1,867,410 Allied Irish Banks PLC 26,911,880
485,456 Bank of Ireland 9,902,652
1,562,412 CRH PLC 22,124,860
1,075,020 Greencore Group PLC 5,837,746
--------------
64,777,138
Italy (3.4%)
- -------------------------------------------------------------------------------------------------------------
2,090,599 Banca Commerciale Italiana 12,480,697
199,017 Banca Popolare di Bergamo 4,090,780
2,327,298 Ente Nazionale Idrocarburi (ENI) SPA 15,226,944
2,477,350 Telecom Italia SPA 18,205,220
--------------
50,003,641
Netherlands (10.6%)
- -------------------------------------------------------------------------------------------------------------
1,007,722 ABN AMRO Holding N.V. 23,536,588
133,524 Akzo-Nobel N.V. 29,626,866
556,764 Internationale Nederlanden Groep 36,389,089
168,830 Koninklijke KPN N.V. 6,486,452
83,693 Nutreco Holding N.V. 2,923,916
106,302 Nutreco Holding N.V. 144A (NON) 3,740,912
344,222 Philips Electronics N.V. 28,882,219
168,830 TNT Post Group N.V. 4,307,733
309,226 Vendex International N.V. 11,607,355
296,059 Vedior N.V. (NON) 8,352,989
--------------
155,854,119
Poland (0.8%)
- -------------------------------------------------------------------------------------------------------------
128,055 Bank Handlowy W Warszawie 144A (NON) 2,443,868
6,200 Bank Handlowy W Warszawie 118,324
124,858 Bank Handlowy W Warszawie GDR 2,353,573
190,564 Bank Handlowy W Warszawie 144A, GDR 3,592,131
20,169 Bank Slaski S.A. 1,354,440
294,242 Wielkopolski Bank Kredytowy S.A. 2,279,964
--------------
12,142,300
Portugal (2.9%)
- -------------------------------------------------------------------------------------------------------------
37,647 Banco Comercial Portugues, S.A. 1,067,113
231,656 Cimpor-Cimentos de Portugal, SGPS, S.A. 8,124,991
670,359 Electricidade de Portugal S.A. 15,556,221
322,618 Portugal Telecom S.A. 17,068,915
--------------
41,817,240
Spain (3.1%)
- -------------------------------------------------------------------------------------------------------------
22,982 Banco Pastor S.A. 1,295,584
32,739 CF Alba 3,595,233
438,703 Iberdola S.A. 7,119,208
259,954 Metrovacesa 7,640,728
144,382 Mapfre Vida Seguros 6,887,884
397,376 Telfonica de Espana 18,361,560
--------------
44,900,197
Sweden (5.0%)
- -------------------------------------------------------------------------------------------------------------
8,254 Fastighets AB Balder 82,106
168,871 ForeningsSparbanken AB 5,071,201
563,049 LM Ericsson Class B 16,415,218
568,272 Nordbanken Holding AG 4,159,649
145,662 Pharmacia & Upjohn, Inc. ADS 6,688,933
245,300 Skandinaviska Enskilda Bank Class A 4,189,621
545,989 Svenska Cellulosa AB Class B 14,107,449
252,325 Svenska Handelsbanken 11,681,713
386,130 Volvo AB 11,474,710
--------------
73,870,600
Switzerland (9.1%)
- -------------------------------------------------------------------------------------------------------------
3,225 Julius Baer Holdings AG 10,074,144
4,889 Liechtenstein Global Trust AG 5,342,818
19,635 Nestle S.A. 41,958,664
19,444 Novartis AG ADR 32,308,529
89,100 Union Bank of Switzerland AG 33,082,554
16,952 Zurich Versicherungs 10,802,855
--------------
133,569,564
United Kingdom (25.9%)
- -------------------------------------------------------------------------------------------------------------
5,309,705 Avis Europe PLC 144A ADR (NON) 24,014,972
2,069,736 B A T Industries PLC (NON) 20,700,258
1,275,839 Bass PLC 23,882,796
1,716,468 British Airways PLC 18,554,756
1,464,059 British Petroleum Co. PLC 21,329,445
2,448,305 BTR PLC 6,937,834
1,028,686 Burmah Castrol PLC 18,347,469
995,600 Cable & Wireless Communications (NON) 10,073,563
1,505,876 Cookson Group PLC 5,170,898
1,094,599 Dixons Group PLC 8,721,526
694,712 Glaxo Wellcome PLC 20,832,698
769,883 Granada Group PLC 14,142,164
765,397 HSBC Holdings PLC 19,405,530
373,049 Molins PLC 1,355,601
587,756 National Westminster Bank 10,492,913
1,610,918 Peninsular and Oriental Steam Navigation Co. 23,173,612
518,555 Premier Farnell PLC 2,627,713
890,514 Rio Tinto PLC 10,019,685
1,137,887 Royal & Sun Alliance Insurance Group PLC 11,750,328
3,059,515 Scottish Power PLC 26,774,504
1,437,670 Securicor Group PLC (NON) 11,694,686
350,945 Siebe PLC 7,002,333
828,329 Smiths Industries PLC 11,460,155
1,638,454 Storehouse PLC 6,800,536
2,521,085 Thomson Travel Group PLC 144A (NON) 7,858,482
4,166,639 Tomkins PLC 22,589,818
1,147,763 Vodafone Group PLC 14,549,933
--------------
380,264,208
--------------
Total Common Stocks (cost $1,147,022,764) $1,417,522,901
SHORT-TERM INVESTMENTS (3.8%) (a) (cost $55,453,933)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$55,445,000 Interest in $11,687,000 joint repurchase agreement dated
June 30, 1998 with SBC Warburg due July 1, 1998 with
respect to various U.S. Treasury obligations -- maturity
value of $55,453,933 for an effective yield of 5.8% $55,453,933
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,202,476,697) (b) $1,472,976,834
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,467,779,504.
(b) The aggregate identified cost on a tax basis is $1,203,726,323, resulting in gross unrealized appreciation
and depreciation of $302,270,337 and $33,019,826, respectively, or net unrealized appreciation of
$269,250,511.
(NON) Non-income-producing security.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers.
ADR, ADS, or GDR after the name of a foreign holding stands for American Depository Receipts, American
Depository Shares or Global Depository Receipts, respectively representing ownership of foreign securities
on deposit with a domestic custodian bank.
The fund had the following industry concentration greater than 10% at June 30, 1998 (as a percentage of net
assets) (unaudited):
Insurance and Finance 26.3%
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
June 30, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,202,476,697) (Note 1) $1,472,976,834
- ---------------------------------------------------------------------------------------------------
Foreign currency (cost $109,691) 109,454
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 5,864,240
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 16,592,812
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 15,278,916
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 1,025,313
- ---------------------------------------------------------------------------------------------------
Total assets 1,511,847,569
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 18,798
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 34,431,891
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 5,694,774
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,333,043
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 234,400
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,222
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,795
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,033,319
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 307,823
- ---------------------------------------------------------------------------------------------------
Total liabilities 44,068,065
- ---------------------------------------------------------------------------------------------------
Net assets $1,467,779,504
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,125,017,479
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 10,855,424
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investment
and foreign currency transactions (Note 1) 61,422,187
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 270,484,414
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,467,779,504
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($791,870,803 divided by 33,446,305 shares) $23.68
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $23.68)* $25.12
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($633,294,378 divided by 27,407,713 shares)** $23.11
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($42,614,323 divided by 1,812,970 shares) $23.51
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $23.51)* $24.36
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the
offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent deferred
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended June 30, 1998
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $2,071,407) $ 22,158,596
- --------------------------------------------------------------------------------------------------
Interest 2,238,907
- --------------------------------------------------------------------------------------------------
Total investment income 24,397,503
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 6,715,370
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,339,412
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 19,283
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 16,268
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,210,708
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 3,880,500
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 176,038
- --------------------------------------------------------------------------------------------------
Reports to shareholders 76,939
- --------------------------------------------------------------------------------------------------
Registration fees 195,174
- --------------------------------------------------------------------------------------------------
Auditing 37,937
- --------------------------------------------------------------------------------------------------
Legal 10,380
- --------------------------------------------------------------------------------------------------
Postage 129,151
- --------------------------------------------------------------------------------------------------
Other 31,002
- --------------------------------------------------------------------------------------------------
Total expenses 14,838,162
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (361,405)
- --------------------------------------------------------------------------------------------------
Net expenses 14,476,757
- --------------------------------------------------------------------------------------------------
Net investment income 9,920,746
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 84,285,496
- --------------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Notes 1 and 3) 1,752,957
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (490,942)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 178,897,566
- --------------------------------------------------------------------------------------------------
Net gain on investments 264,445,077
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $274,365,823
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended June 30
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 9,920,746 $ 4,096,685
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 86,038,453 34,980,853
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments
and assets and liabilities in foreign currencies 178,406,624 62,782,001
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 274,365,823 101,859,539
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (7,640,645) (2,225,968)
- ----------------------------------------------------------------------------------------------------------------------
Class B (4,471,018) (1,016,631)
- ----------------------------------------------------------------------------------------------------------------------
Class M (297,933) (79,263)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (23,126,779) (11,300,291)
- ----------------------------------------------------------------------------------------------------------------------
Class B (19,048,225) (8,451,546)
- ----------------------------------------------------------------------------------------------------------------------
Class M (1,128,746) (486,635)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 658,369,779 290,304,737
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 877,022,256 368,603,942
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 590,757,248 222,153,306
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed
net investment income of $10,855,424
and $11,565,812, respectively) $1,467,779,504 $590,757,248
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended June 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.96 $15.91 $13.88 $11.64 $9.84
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .31(c) .24(c) .24(c) .18 .18
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 5.91 4.07 2.19 2.22 1.73
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 6.22 4.31 2.43 2.40 1.91
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.37) (.20) -- -- (.11)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.13) (1.06) (.40) (.16) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.50) (1.26) (.40) (.16) (.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $23.68 $18.96 $15.91 $13.88 $11.64
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 35.22 28.49 17.82 20.84 19.45
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $791,871 $313,492 $127,980 $90,420 $67,471
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.32 1.45 1.47 1.38 1.50
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) 1.46 1.43 1.59 1.45 1.17
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 48.86 55.45 38.85 44.33 36.73
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (d) $.0416 $.0435
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended June 30, 1996 and thereafter, includes
amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Per share net investment income (loss) has been determined on the basis of the weighted average
number of shares outstanding during the period.
(d) Average commission rate paid on security trades is requuired for fiscal periods beginning on or
after September 1, 1995.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 1, 1994+
operating performance Year ended June 30 to June 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.56 $15.64 $13.75 $11.62 $12.49
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .14(c) .13(c) .14(c) .08 .04
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 5.80 3.97 2.15 2.21 (.91)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 5.94 4.10 2.29 2.29 (.87)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.26) (.12) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.13) (1.06) (.40) (.16) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.39) (1.18) (.40) (.16) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $23.11 $18.56 $15.64 $13.75 $11.62
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 34.26 27.51 16.95 19.92 (6.97)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $633,294 $261,454 $90,126 $45,733 $21,368
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 2.07 2.20 2.23 2.13 .95*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) .69 .76 .96 .74 .54*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 48.86 55.45 38.85 44.33 36.73
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (d) $.0416 $.0435
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended June 30, 1996 and thereafter, includes
amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Per share net investment income (loss) has been determined on the basis of the weighted average
number of shares outstanding during the period.
(d) Average commission rate paid on security trades is requuired for fiscal periods beginning on or
after September 1, 1995.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Dec. 1, 1994+
operating performance Year ended June 30 to June 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $18.85 $15.86 $13.90 $12.35
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .20(c) .19(c) .24(c) .09
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 5.89 4.03 2.12 1.62
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 6.09 4.22 2.36 1.71
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.30) (.17) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.13) (1.06) (.40) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.43) (1.23) (.40) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $23.51 $18.85 $15.86 $13.90
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 34.56 27.91 17.28 14.06*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $42,614 $15,811 $4,047 $746
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.82 1.95 2.02 1.08*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) .99 1.10 1.59 1.61*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 48.86 55.45 38.85 44.33
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (d) $.0416 $.0435
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended June 30, 1996 and thereafter, includes
amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Per share net investment income (loss) has been determined on the basis of the weighted average
number of shares outstanding during the period.
(d) Average commission rate paid on security trades is requuired for fiscal periods beginning on or
after September 1, 1995.
</TABLE>
Notes to financial statements
June 30, 1998
Note 1
Significant accounting policies
Putnam Europe Growth Fund ("the fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks capital appreciation by
investing primarily in common stocks and other securities of European
companies.
The fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 5.75%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.50% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at fair market value, which is determined using the last
reported sale price, or, if no sales are reported--as is the case of some
securities traded over-the-counter--the last reported bid price. Securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60 days
or less are stated at amortized cost, which approximates market value. All
other investments are stated at fair value following procedures approved by
the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, and other assets and liabilities are recorded in the books and
records of the fund after translation to U.S. dollars based on the exchange
rates on that day. The cost of each security is determined using historical
exchange rates. Income and withholding taxes are translated at prevailing
exchange rates when accrued or incurred. The fund does not isolate that
portion of realized or unrealized gains or losses resulting from changes in
the foreign exchange rate on investments from fluctuations arising from
changes in the market prices of the securities. Such gains and losses are
included with the net realized and unrealized gain or loss on investments. Net
realized gains and losses on foreign currency transactions represent net
exchange gains or losses on closed forward currency contracts, disposition of
foreign currencies and the difference between the amount of investment income
and foreign withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using current forward currency
exchange rates supplied by a quotation service. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract
is "marked to market" daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The fund could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet the
terms of their contracts or if the fund is unable to enter into a closing
position.
G) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the year ended June 30, 1998, the fund had
no borrowings against the line of credit.
H) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
I) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital
gain distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences include treatment
of realized gains and losses on foreign currency and unrealized gains and
losses on passive foreign investment companies. Reclassifications are made to
the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the year ended June 30, 1998, the fund reclassified
$1,778,462 to increase undistributed net investment income and $192,577 to
increase paid-in-capital, with a decrease to accumulated net realized gain on
investments of $1,971,039. The calculation of net investment income per share
in the financial highlights table excludes these adjustments.
Note 2
Management fee, administrative
services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund for the
quarter. Such fee is based on the following annual rates: 0.80% of the first
$500 million of average net assets, 0.70% of the next $500 million, 0.65% of
the next $500 million, 0.60% of the next $5 billion, 0.575% of the next $5
billion, 0.555% of the next $5 billion, 0.54% of the next $5 billion and 0.53%
thereafter.
As part of the subcustodian contract between the subcustodian bank and Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc., the
subcustodian bank has a lien on the securities of the fund to the extent
permitted by the fund's investment restrictions to cover any advances made by
the subcustodian bank for the settlement of securities purchased by the fund.
At June 30, 1998, the payable to the subcustodian bank represents the amount
due for cash advance for the settlement of a security purchased.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the year ended June 30, 1998, fund expenses were reduced by $361,405 under
expense offset arrangements with PFTC and brokerage service arrangements.
Investor servicing and custodian fees reported in the Statement of operations
exclude these credits. The fund could have invested a portion of the assets
utilized in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee of which $1,200 has
been allocated to the fund and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees have approved payment by the fund at an annual rate of 0.25%, 1.00%
and 0.75% of the average net assets attributable to class A, class B and class
M shares respectively.
For the year ended June 30, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $790,212 and $44,390 from the sale of
class A and class M shares, respectively and $427,456 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the year
ended June 30, 1998, Putnam Mutual Funds Corp., acting as underwriter received
$18,565 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended June 30, 1998, purchases and sales of investment
securities other than short-term investments aggregated $986,611,200 and
$412,920,747, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Capital shares
At July 30, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
June 30, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 54,950,759 $1,141,020,246
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,533,660 27,866,577
- ------------------------------------------------------------
56,484,419 1,168,886,823
Shares
repurchased (39,575,591) (811,313,477)
- ------------------------------------------------------------
Net increase 16,908,828 $ 357,573,346
- ------------------------------------------------------------
Year ended
June 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 42,860,100 $ 736,786,046
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 760,153 12,291,699
- ------------------------------------------------------------
43,620,253 749,077,745
Shares
repurchased (35,128,868) (606,739,760)
- ------------------------------------------------------------
Net increase 8,491,385 $ 142,337,985
- ------------------------------------------------------------
Year ended
June 30, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 22,984,899 $ 477,136,111
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,192,124 21,231,758
- ------------------------------------------------------------
24,177,023 498,367,869
Shares
repurchased (10,853,484) (218,673,987)
- ------------------------------------------------------------
Net increase 13,323,539 $ 279,693,882
- ------------------------------------------------------------
Year ended
June 30, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 18,005,860 $301,810,768
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 531,337 8,442,924
- ------------------------------------------------------------
18,537,197 310,253,692
Shares
repurchased (10,217,228) (171,957,060)
- ------------------------------------------------------------
Net increase 8,319,969 $138,296,632
- ------------------------------------------------------------
Year ended
June 30, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 2,224,241 $ 47,334,934
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 74,988 1,356,492
- ------------------------------------------------------------
2,299,229 48,691,426
Shares
repurchased (1,325,283) (27,588,875)
- ------------------------------------------------------------
Net increase 973,946 $ 21,102,551
- ------------------------------------------------------------
Year ended
June 30, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 1,929,111 $ 33,275,091
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 33,373 537,639
- ------------------------------------------------------------
1,962,484 33,812,730
Shares
repurchased (1,378,637) (24,142,610)
- ------------------------------------------------------------
Net increase 583,847 $ 9,670,120
- ------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $74,580,649 as capital gain, which includes
$31,205,948 as 20% capital gain, for its taxable year ended June 30,
1998.
For the period, dividends from foreign countries were $24,169,118 or
$0.386 per share (for all share classes). Taxes paid to foreign
countries were $2,071,407 or $0.033 per share (for all classes of
shares).
The fund has designated 0.07% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1999 will show the tax status of
all distributions paid to your account in calendar 1998.
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Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Mark D. Pollard
Vice President and Fund Manager
Justin M. Scott
Vice President and Fund Manager
Omid Kamshad
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Europe Growth
Fund. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency;
and involve risk, including the possible loss of the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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