Putnam
Diversified
Equity
Trust
[box]
ANNUAL REPORT
February 29, 1996
[Putnam scales logo]
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Fund highlights
(dagger) "Putnam Diversified Equity Trust's portfolio is made up of three
equally represented stock sectors -- domestic value, domestic
growth, and foreign stocks -- which we believe provide an investor
with a fundamentally sound approach to pursuing capital
appreciation. Indeed, the fund's annualized and cumulative
performance since inception emphatically validates this trisector
investment strategy."
-- David L. King, lead fund manager
(dagger) While Putnam and fund investors consider Putnam Diversified Equity
Trust a broadly diversified growth fund, Lipper Analytical Services
has placed the fund in its global category because it has at least
25% of its assets invested overseas. Ranking 11th and 13th out of
132 global funds, Putnam Diversified Equity Trust's class A and
class B shares, respectively, placed in the top 10% for 1-year
performance ended March 31, 1996.*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
16 Portfolio holdings
25 Financial statements
*Lipper rankings are based on total return performance, vary over time, and
do not reflect the effects of sales charges. Performance of other share
classes will vary. Past performance is not indicative of future results.
2
<PAGE>
From the Chairman
[photo of George Putnam]
(c) Karsh, Ottawa
Dear Shareholder:
Putnam Diversified Equity Trust was well into its fiscal year when the U.S.
stock market began one of its strongest advances in recent memory. At the
same time, stocks in some key international markets began to show increasing
strength. Management's adept positioning of the portfolio among these markets
is clearly reflected in your fund's results during the fiscal year ended
February 29, 1996.
While we are pleased with the fund's performance, the U.S. market's sharp
drop just after the fiscal year's close served as an abrupt reminder that
even the strongest markets will take an occasional pause. Indeed, more
turbulence may lie ahead; Putnam Management nevertheless believes there is
still some life in the U.S. market's broad advance and looks for significant
strengthening in foreign markets in the months ahead.
In the report that follows, your fund's management team discusses performance
in fiscal 1996 and looks at prospects for fiscal 1997.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
April 17, 1996
3
<PAGE>
Report from the Fund Managers
David L. King, lead manager
John K. Storkerson
Charles H. Swanberg
The indefatigable bull market in the United States and generally supportive
conditions in foreign markets were instrumental in helping Putnam Diversified
Equity Trust realize significant gains this year. However, credit must also
go to your fund's trisector strategy. Because the fund is able to diversify
holdings among such a broad variety of countries and companies, we were able
to choose the most promising opportunities from a very large field indeed.
While each portfolio sector -- domestic value, domestic growth, and
international -- contributed to the impressive returns, the growth sleeve
provided the lion's share of performance. Full details can be found in the
performance section following this report.
(right arrow) Value Sector Emphasis Shifts Toward Consumer Cyclicals
When selecting stocks for the value segment, we focus on companies that we
believe are undervalued or misunderstood. This approach often puts us a step
ahead of the general market in identifying future performers. For example,
four types of stocks -- pharmaceuticals, consumer nondurables, tobacco
companies, and interest-rate-sensitive industries such as banking and finance
- -- offered attractive values when the fund began operations in mid-1994. All
four have since appreciated significantly in response to the demise of
health-care reform, consolidation among drug companies, declining interest
rates, and the increased global competitiveness of corporate America. By
owning substantial positions in companies like Eli Lilly & Co., Baxter
International, Wells Fargo & Co., Eastman Kodak, and Philip Morris early on,
your fund benefited from their dramatic appreciation during fiscal 1996. We
have since taken profits on all of these positions except Philip Morris. In
addition, we have realized substantial gains from former holdings in Sallie
Mae and Bear Stearns.
4
<PAGE>
Among other strong performers in this part of the portfolio were Bankers
Trust, IBM Corp., special situation stocks Dole Food Company and General
Signal Corp., and merger beneficiary Upjohn Company (with Pharmacia). While
these stocks were viewed favorably at period's end, all holdings are subject
to review and adjustment in accordance with the fund's investment strategy
and may well vary in the future.
As the period progressed, our search for value shifted to consumer cyclical
stocks -- those that tend to perform well in anticipation of, and during,
economic expansion -- such as retailers and automotive-related issues. With
two years of weak price performance behind them and significant positive
change occurring internally, many consumer cyclicals now meet our valuation
criteria. Recent purchases have included K mart and Dayton Hudson Corp. We
also increased the number of shares owned in automotive giant General Motors,
which we believe is undergoing considerable positive change.
(right arrow) GROWTH SECTOR HELD GREATEST NUMBER OF STRONG PERFORMERS
Slow-but-steady economic growth, declining interest rates, high corporate
profits, and productivity gains pushed growth stock prices to dizzying
heights during fiscal 1996. A number of issues in telecommunications,
broadcasting, technology, medical devices, and health care stood out as star
performers. America Online, Stratacom, and U.S. Robotics are just a few of
the technology stocks in the fund's portfolio that performed extremely well.
[typeset representation of bar chart]
TOP INDUSTRY SECTORS*
Business services 5.6%
Banks 5.4%
Retail 4.9%
Finance 4.8%
Computer software 3.6%
*Based on net assets as of 2/29/96. Holdings will vary over time.
[end bar chart]
5
<PAGE>
Pharmaceutical, biotechnology, and medical-equipment companies benefited from
the replenishment of inventories by providers and hospitals, a rejuvenated
FDA approval cycle, and new-product development. Boston Scientific and
Medtronic were two of the fund's big winners.
The recently enacted deregulation in broadcasting and telecommunications
bolstered the appreciation of several holdings, including two radio stocks,
Infinity Broadcasting and Clear Channel Communications. The anticipation of
higher earnings during the presidential election campaign and the 1996 summer
Olympics also contributed to these stocks' rise.
Although retail stocks remained somewhat weak because of diminished consumer
confidence, those we held have generally performed well. For example,
Corporate Express, an office-products distributor, gained 93% in value during
the year.
The growing uncertainty surrounding corporate earnings prompted us to become
more defensive as the year progressed. Many of the fund's health-care
companies fit the defensive mold, as do several financial, multinational, and
conglomerate issues. As investors migrated toward companies exhibiting the
potential for predictable earnings growth, the prices of large-company
holdings gained further momentum.
(right arrow) EUROPEAN STOCKS LED INTERNATIONAL SEGMENT, JAPANESE ISSUES
RECOVERED AS YEAR PROGRESSED
European stocks were the stars of last year's international setting. With
nearly 55% of the fund's international component invested in Europe at fiscal
year's end, we have been able to capitalize on meaningful appreciation
opportunities in the top-performing Swiss, Irish, and Dutch markets. Three
portfolio highlights include Getronics, a Dutch software facilitation
company; BBC Brown Boveri & Cie, a Swiss electrical-equipment manufacturer;
and CRH, an Irish building-products company. By period's end, we had
harvested some of the gains in these markets to take advantage of what we
believed were better values elsewhere in the region. Since August, we've
added SGS-Thomson Electronics, a French semiconductor manufacturer, and
Swedish depository shares of pharmaceutical giant Pharmacia
6
<PAGE>
TOP 10 HOLDINGS (2/29/96)
Thermo Electron Corp.
Energy related
HFS, Inc.
Lodging
IBM Corp.
Computer equipment
Harnischfeger Industries, Inc.
Machinery
Federal National Mortgage Assoc.
Finance
NationsBank Corp.
Banks
General Signal Corp.
Basic industrial products
Input/Output, Inc.
Business services
Potomac Electric Power Co.
Electric utilities
Lockheed Martin Corp.
Aerospace and defense
These holdings represent 9.3% of the fund's net assets. Portfolio holdings
will vary over time.
& Upjohn, Inc. We've also increased the number of shares held in Veba, a
large German utility conglomerate.
Japan recovered sharply in the past six months amid central bank interest
rate cuts and concerted efforts to reduce the exchange rate of the yen
against the dollar. Given our strong conviction early on that forthcoming yen
weakness would lend support to the Japanese stock market, the market's
performance has been particularly disappointing of late. Behind the
lackluster results may well be growing concerns over the government's bailout
of several financial institutions and the recent fiscal window dressing
taking place in anticipation of corporate Japan's fiscal year end on March
31. We believe better performance lies ahead and look forward to solid
returns from the fund's Japanese holdings.
Hong Kong, whose market is tied to the U.S. dollar, was the performance
leader in the Pacific Rim, with Hong Kong Shanghai Bank and Cheung Kong
Holdings, a property company, pro-
7
<PAGE>
viding strong results. Holdings in Singapore and Malaysia also helped boost
performance. However, valuation levels in these markets have become too high
for our liking, prompting us to reduce the fund's exposure. At the moment,
the fund has no holdings in the emerging markets of Latin America, Eastern
Europe, and China, although we will consider investing in these areas should
fundamentally sound, attractively valued opportunities arise.
(right arrow) OUTLOOK REMAINS GENERALLY POSITIVE
We remain optimistic about the long-term benefits of investing in a trisector
portfolio. In the United States, historically low inflation and low interest
rates continue to provide a positive backdrop for stock performance, although
it is clear the market's sustained advance cannot last indefinitely. Some
moderation in prices is not entirely unexpected.
Abroad, the likelihood of further interest rate cuts, greater fiscal
responsibility, and a stronger commitment to shareholder value have set the
stage for economic revival and solid growth. Slowly, we have begun increasing
the fund's international weighting and may continue the process in the months
ahead.
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 2/29/96, there is no guarantee the fund will continue to hold
these securities in the future.
Investing in non-U.S. securities may be subject to certain risks associated
with currency fluctuations, economic instability, and political developments.
8
<PAGE>
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Diversified Equity Trust is designed for investors seeking
capital appreciation through a diversified portfolio consisting primarily of
domestic growth, domestic value, and international stocks.
This section provides, at a glance, information about your fund's
performance. 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.
TOTAL RETURN FOR PERIODS ENDED 2/29/96
Inception Class A Class B Class M
dates 7/1/94 7/1/94 7/3/95
NAV POP NAV CDSC NAV POP
------------------------------------------------------------------------
1 year 30.58% 23.06% 30.05% 25.05% -- --
------------------------------------------------------------------------
Life of class 35.97 28.13 34.95 30.95 17.95% 13.86%
Annual average 20.20 16.00 19.66 17.52 -- --
------------------------------------------------------------------------
COMPARATIVE RETURNS FOR PERIODS ENDED 2/29/96
Standard & Morgan
Poor's(R) Stanley
500 Index EAFE
------------------------------------------------------------------
1 year 34.66% 16.85%
------------------------------------------------------------------
Life of class A and class B 49.87 11.01
Annual average 27.41 6.46
------------------------------------------------------------------
Life of class M 18.95 9.20
------------------------------------------------------------------
Performance data represent past results, do not reflect future performance,
and will differ for each share class. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment returns
and principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. POP assumes 5.75% maximum
sales charge for class A shares and 3.50% for class M shares. CDSC for class
B shares assumes the applicable sales charge, with the maximum being 5%.
Neither index takes into account brokerage commissions or other costs. The
fund's portfolio contains securities that do not match those in the indexes.
It is not possible to invest directly in an index.
9
<PAGE>
[typeset representation of line chart]
GROWTH OF $10,000 INVESTMENT
Cumulative total return of a $10,000
investment since 7/1/94
Fund's class A shares S&P 500 Morgan Stanley
at POP Index EAFE Index
9501 10315 10096
9945 10703 10335
9834 10489 10010
9911 10708 10343
9523 10285 9846
9646 10487 9908
9546 10741 9527
9812 11129 9500
10034 11505 10092
10268 11826 10472
10546 12256 10347
10846 12599 10165
11446 13000 10798
11490 12996 10386
11846 13598 10589
11835 13530 10305
12208 14085 10591
12429 14414 11018
12569 14884 11063
12813 14987 11101
Past performance is no assurance of future results. A $10,000 investment in
the fund's class B shares at inception on 7/1/94 would have been valued at
$13,495 on 2/29/96 ($13,095 with a redemption at the end of the period). A
$10,000 investment in the fund's class M shares at inception on 7/3/95 would
have been valued at $11,795 at net asset value on 2/29/96, $11,386 at public
offering price.
[end line chart]
PRICE AND DISTRIBUTION INFORMATION
12 months ended 2/29/96
<TABLE>
<CAPTION>
Class A Class B Class M
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions (number) 1 1 1
-----------------------------------------------------------------------------------
Income $0.084 $0.051 $0.076
-----------------------------------------------------------------------------------
Capital gains
-----------------------------------------------------------------------------------
Long-term 0.023 0.023 0.023
Short-term 0.371 0.371 0.371
-----------------------------------------------------------------------------------
Total $0.478 $0.445 $0.470
-----------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
-----------------------------------------------------------------------------------
2/28/95 $ 8.83 $ 9.37 $ 8.80 -- --
-----------------------------------------------------------------------------------
7/3/95 (inception of
class M shares) -- -- -- $ 9.76 $10.11
-----------------------------------------------------------------------------------
2/29/96 11.02 11.69 10.97 11.01 11.41
-----------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
TOTAL RETURN FOR PERIODS ENDED 3/31/96
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
---------------------------------------------------------------------
1 year 31.05% 23.53% 30.41% 25.41% -- --
---------------------------------------------------------------------
Life of class 39.55 31.50 38.40 34.40 21.05% 16.86%
Annual average 20.98 16.94 20.41 18.40 -- --
---------------------------------------------------------------------
Performance data represent past results, do not reflect future performance,
and will differ for each share class. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment returns
and principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. POP assumes 5.75% maximum
sales charge for class A shares and 3.50% for class M shares. CDSC for class
B shares assumes the applicable sales charge, with the maximum being 5%.
TERMS AND DEFINITIONS
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.
11
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COMPARATIVE BENCHMARKS
Standard & Poor's 500 Index is an unmanaged list of common stocks whose
performance assumes reinvestment of all distributions. It is frequently used
as a general measure of stock market performance.
Europe, Australia, and Far East (EAFE) component of the Morgan Stanley
Capital International (MSCI) World Index is an unmanaged list of
approximately 1,045 equity securities originating in 18 countries listed on
the stock exchanges of Europe, Australia, and the Far East, with all values
expressed in U.S. dollars. Performance figures reflect changes in market
prices and reinvestment of distributions net of withholding taxes. Because
the fund is a managed portfolio investing in a wide variety of foreign
securities, the securities it owns will not match those in the index.
12
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A Putnam perspective on risk and reward
You've probably been told how important it is to understand the relationship
between an investment's potential rewards and its accompanying risks. Given
the cautionary nature of such instructions, it may take most investors a
while to realize that risk has a positive side.
Every risk signals a potential reward. Selecting only those investments that
offer the greatest degree of security generally leads to only modest rewards.
Furthermore, even insured or guaranteed investments may be subject to changes
in their rates of return or, in some cases, in their principal values.
Experienced investors know that no investment is truly risk free and are
therefore willing to take on some measure of risk in order to increase their
potential gains.
The greater the risk, the greater the potential reward. Accepting an
appropriate level of investment risk can give you a better chance of
outpacing inflation over time and seeking to maximize your investment's
return. How much risk? Your financial advisor's feedback and your time
horizon can make all the difference in determining how much risk is
compatible with your investment goals and your peace of mind.
(arrow right) FITTING YOUR FUND SELECTION TO YOUR RISK TOLERANCE
How do you find the right balance between investment risks and their
potential rewards? It's helpful to understand the types of risks that can
apply to different types of investments, and to look at your own portfolio
with this perspective.
For short-term goals, your first priority may be managing market risk.
Longer-term investors may be more concerned with inflation risk. And all
income-oriented investors should consider interest-rate, credit, and
prepayment risks carefully. Within each of Putnam's four investment
categories, you can select funds with differing levels of risk and reward
potential to customize your portfolio.
13
<PAGE>
This list covers only the most general types of risks; however, each
investment will also have its own specific risks. You will find a more
detailed discussion of these risk considerations in each fund's prospectus.
(arrow right) A RUNDOWN OF RISK TYPES
MARKET RISK Most important for stock funds, but relevant to all funds, this
is a measure of how sensitive a fund's holdings are to changes in general
market conditions. Remember, though, that securities that lose value quickly
in market declines may also show the strongest gains in more favorable
environments.
INTEREST-RATE RISK Since bond prices fall as interest rates rise, this type
of risk is a particular concern for fixed-income investors. However,
interest-rate increases can also have a substantial negative effect on the
stock market.
INFLATION RISK If your investments cannot keep pace with inflation, your
money will begin to lose its purchasing power. Stock investments are
generally considered among the best ways of addressing inflation risk over
the long term.
CREDIT AND PREPAYMENT RISK Credit risk is the concern that the security's
issuer will not be able to meet its payment, while prepayment risk involves
the premature payoff of a loan, with a resulting loss of interest income.
Professional management and in-depth research are invaluable in managing both
these risks.
LIQUIDITY RISK Not all investments can be readily converted into cash at
their perceived market values. Liquidity risk can affect the price of
securities held in the fund's portfolio and thus, the fund's share prices.
14
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Report of independent accountants
To the Trustees and Shareholders of
Putnam Diversified Equity Trust
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
Diversified Equity Trust at February 29, 1996, 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 February 29, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
April 16, 1996
15
<PAGE>
Portfolio of investments owned
February 29, 1996
<TABLE>
<CAPTION>
COMMON STOCKS (93.8%)*
NUMBER OF SHARES VALUE
<S> <C> <C>
Advertising (0.4%)
- ----------------------------------------------------------------------------------
30,186 Omnicom Group, Inc. $ 1,233,853
Aerospace and Defense (0.8%)
- ----------------------------------------------------------------------------------
31,600 Lockheed Martin Corp. 2,409,500
Airlines (0.6%)
- ----------------------------------------------------------------------------------
24,150 K.L.M.-Royal Dutch Airlines (Netherlands) 803,095
60,000 Singapore Airlines Ltd. (Singapore) 603,570
48,500 Swire Pacific Ltd. Class A (Hong Kong) 423,457
-------------
1,830,122
Apparel (0.6%)
- ----------------------------------------------------------------------------------
34,600 Gucci Group+ 1,453,200
Automotive (2.7%)
- ----------------------------------------------------------------------------------
10,500 Autoliv AB (Sweden) 501,738
40,200 General Motors Corp. 2,060,250
54,400 Magna International, Inc. Class A 2,155,600
104,000 Mitsubishi Motors Corp. (Japan) 859,251
3,400 Peugeot Citroen S.A. (France) 507,895
54,600 Varity Corp.+ 2,061,150
-------------
8,145,884
Banks (5.4%)
- ----------------------------------------------------------------------------------
147,829 Allied Irish Banks PLC (Ireland) 769,073
400 Baer Holdings AG (Germany) 404,663
24,400 Banco de Bilbao Vizcaya (Spain) 948,529
56,000 Bank of Ireland (Ireland)+ 384,035
33,600 Bankers Trust New York Corp.(inverted triangle) 2,171,400
72,761 Barclays Bank PLC (United Kingdom) 864,724
36,000 Development Bank of Singapore Ltd. (Singapore) 512,610
50,600 Fleet Financial Group, Inc. 2,080,925
156,300 Guoco Group Ltd. (Hong Kong) 832,953
66,169 HSBC Holdings PLC (Hong Kong) 1,061,306
45,000 Malayan Banking BHD (Malaysia) 411,499
32,000 Mitsubishi Bank Ltd. (Japan) 654,117
34,500 NationsBank Corp. 2,544,375
8,000 Societe Generale (France) 911,342
6,200 Southern Bank Berhad (Malaysia) 13,626
80,200 United Overseas Bank Ltd. (Singapore) 857,906
33,000 Yamaguchi Bank Ltd. (Japan) 545,921
-------------
15,969,004
Basic Industrial Products (1.5%)
- ----------------------------------------------------------------------------------
110 Asahi Diamond Industrial Co., Ltd. (Japan) 1,537
69,000 General Signal Corp. 2,509,875
101,000 Mitsui Fudosan Co. Ltd. (Japan) 857,511
16
<PAGE>
COMMON STOCKS
NUMBER OF SHARES VALUE
Basic Industrial Products (continued)
---------------------------------------------------------------------------------
2,300 Rieter Holding AG (Switzerland) $ 666,445
1,600 Sommer Allibert (France) 488,479
--------------
4,523,847
Broadcasting (0.6%)
---------------------------------------------------------------------------------
24,300 Clear Channel Communications, Inc.+ 1,230,188
16,900 Infinity Broadcasting Corp. Class A+ 697,125
--------------
1,927,313
Building and Construction (0.2%)
---------------------------------------------------------------------------------
400 JGC Corp. (Japan) 4,640
62,000 Shimizu Corp. (Japan)+ 654,307
700 Taihei Dengyo Corp. Ltd. (Japan) 10,981
--------------
669,928
Building Products (1.3%)
---------------------------------------------------------------------------------
127,200 CRH PLC (Ireland) 1,062,813
10,120 Lafarge Coppee (Bearer) (France) 695,117
49,000 Marui Co. Ltd. (Japan) 941,053
26,000 Sungei Way Holdings Berhad (Malaysia) 100,510
15,500 Tarkett AG (Germany)+ 339,063
27,000 Tostem Corp. (Japan) 829,150
--------------
3,967,706
Business Services (5.6%)
---------------------------------------------------------------------------------
26,000 Airgas, Inc.+ 936,000
36,400 Alco Standard Corp. 1,724,450
54,500 Corporate Express, Inc.+ 1,621,375
50,000 Dai Nippon Printing Co., Ltd. (Japan) 860,430
32,400 Flight Safety International, Inc. 1,729,350
27,560 General Motors Corp. Class E 1,574,365
81,800 Input/Output, Inc.+ 2,433,550
33,375 Interpublic Group Cos. Inc. 1,405,922
16,000 Komori Printing Machinery Co., Ltd. (Japan) 400,076
36,790 Paychex, Inc. 2,028,035
22,118 Robert Half International, Inc.+ 926,191
450 Societe Generale de Surveillance Holdings S.A.
(Bearer) (Switzerland) 861,782
--------------
16,501,526
Chemicals (1.1%)
---------------------------------------------------------------------------------
7,000 Akzo-Nobel N.V. (Netherlands) 777,778
5,030 Dutch States Mines N.V. (Netherlands) 469,760
67,000 KAO Corp. (Japan) 840,844
70,000 Sekisui Chemical Co. Ltd. (Japan) 891,804
500 Solvay S.A. (Belgium) 294,375
--------------
3,274,561
Combined Utilities (0.4%)
---------------------------------------------------------------------------------
28,000 Veba AG (Germany)+ 1,316,304
17
<PAGE>
COMMON STOCKS
NUMBER OF SHARES VALUE
Computer Equipment (1.2%)
---------------------------------------------------------------------------------
80,000 Fujitsu Ltd. (Japan) $ 821,449
21,800 IBM Corp. 2,673,225
--------------
3,494,674
Computer Services (1.9%)
---------------------------------------------------------------------------------
40,000 America Online, Inc.+ 1,965,000
5,600 Axime (France)+ 606,875
25,850 First Data Corp. 1,790,113
20,298 Getronics Electric N.V. (Netherlands) 1,157,845
--------------
5,519,833
Computer Software (3.6%)
---------------------------------------------------------------------------------
30,328 Computer Associates Intl., Inc. 2,085,050
41,412 Electronic Arts, Inc.+ 1,035,300
23,300 Electronics for Imaging, Inc.+ 1,065,975
51,065 Informix Corp.+ 1,800,041
19,740 Microsoft Corp.+ 1,948,091
12,214 Netscape Communications Corp.+ 622,914
25,650 Parametric Technology Corp.+ 1,907,719
3,500 Rational Software Corp.+ 129,281
--------------
10,594,371
Conglomerates (1.8%)
---------------------------------------------------------------------------------
36,000 Cartiere Burgo S.P.A. (Italy)+ 194,597
36,200 General Motors Corp. Class H 2,072,450
97,000 Hutchison Whampoa, Ltd. (Hong Kong)+ 614,798
80,500 Ogden Corp. 1,720,688
2,395 Preussag AG (Germany) 712,643
--------------
5,315,176
Consumer Products (0.3%)
---------------------------------------------------------------------------------
7,305 Unilever N.V. (Netherlands) 985,437
Consumer Services (0.2%)
---------------------------------------------------------------------------------
50,000 Pearson PLC (United Kingdom) 523,773
Containers (0.8%)
---------------------------------------------------------------------------------
74,700 Ball Corp. 2,241,000
Cosmetics (0.5%)
---------------------------------------------------------------------------------
55,300 Thermolase Corp.+ 1,444,713
Electric Utilities (3.0%)
---------------------------------------------------------------------------------
120,000 Hong Kong Electric Holdings Ltd. (Hong Kong) 406,674
97,499 Iberdola S.A. (Spain) 959,342
115,000 Long Island Lighting Co. 2,012,500
83,300 Northeast Utilities Co. 1,853,425
92,000 Potomac Electric Power Co. 2,426,500
153,000 Scottish Power PLC (United Kingdom) 857,609
22,300 South Wales Electricity PLC (United Kingdom) 290,296
--------------
8,806,346
18
<PAGE>
COMMON STOCKS
NUMBER OF SHARES VALUE
Electronics and Electrical Equipment (3.0%)
---------------------------------------------------------------------------------
685 BBC Brown Boveri & Cie AG (Bearer) (Switzerland) $ 819,034
12,000 Futaba Corp. (Japan) 555,619
129,400 General Electric Co. PLC (United Kingdom) 732,261
12,600 Hirose Electric Co. Ltd. (Japan) 712,778
8,000 Keyence Corp. (Japan) 943,145
52,000 Leader Universal (Malaysia) 110,204
6,000 Mabuchi Motor (Japan) 367,941
28,500 Murata Manufacturing Co. Ltd. (Japan) 937,536
30,000 Nichicon Corp. (Japan) 416,429
29,000 Nippondenso Co., Ltd. (Japan) 576,250
50,000 Omron Tateisi Electronics Co. (Japan) 1,102,871
18,900 Philips Electronics N.V. (Netherlands) 785,636
58,000 Sharp Corp. (Japan) 904,354
--------------
8,964,058
Energy-Related (1.8%)
---------------------------------------------------------------------------------
25,980 IHC Caland N.V. (Netherlands) 985,345
70,697 Thermo Electron Corp.+ 3,870,661
4,000 VA Technolgies AG (Austria) 505,023
--------------
5,361,029
Entertainment (0.6%)
---------------------------------------------------------------------------------
28,624 Disney (Walt) Productions, Inc. 1,874,872
Environmental Control (0.6%)
---------------------------------------------------------------------------------
2,600 Molten Metal Technology, Inc.+ 93,600
63,200 WMX Technologies, Inc. 1,801,200
--------------
1,894,800
Finance (4.8%)
---------------------------------------------------------------------------------
11,000 ABN AMRO Holding N.V. (Netherlands)+ 510,650
13,320 Argentaria Corp. (Spain) 599,449
40,200 Beneficial Corp. 2,090,400
4,500 Cetelem Group (France) 945,022
8,500 Credit Locale de France S.A. (France) 674,106
79,000 Daiwa Securities Co. Ltd. (Japan) 1,111,618
21,050 Federal Home Loan Mortgage. Corp. 1,736,625
80,500 Federal National Mortgage Association 2,545,813
68,159 MBNA Corp. 1,925,492
89,375 Mercury Finance Co. 1,228,906
20,400 TCF Financial Corp. 767,550
--------------
14,135,631
Food and Beverages (2.7%)
---------------------------------------------------------------------------------
115,000 Archer Daniels Midland Co. 2,213,750
134,409 Argyll Group PLC (United Kingdom) 607,250
57,500 Dole Food Co. 2,314,375
96,486 Greencore Group PLC (Ireland)+ 867,028
50,000 Guinness PLC (United Kingdom) 351,479
34,186 IBP, Inc. 854,650
790 Nestle S.A. (Switzerland) 863,014
--------------
8,071,546
19
<PAGE>
COMMON STOCKS
NUMBER OF SHARES VALUE
Forest Products (0.1%)
---------------------------------------------------------------------------------
6,000 Mayr-Melnhof Karton AG (Austria)+ $ 299,652
Gas Utilities (0.8%)
---------------------------------------------------------------------------------
54,600 Columbia Gas System, Inc. 2,388,750
HMOs (1.1%)
---------------------------------------------------------------------------------
46,900 Healthsource, Inc.+ 1,776,338
16,446 Oxford Health Plans Inc.+ 1,353,711
--------------
3,130,049
Health Care Information Systems (0.7%)
---------------------------------------------------------------------------------
20,400 HBO & Co. 2,019,600
Health Care Services (0.7%)
---------------------------------------------------------------------------------
8,858 Columbia/HCA Healthcare Corp. 484,976
34,375 Healthsouth Rehabilitation Corp. 1,203,125
16,100 Lincare Holdings, Inc.+ 504,131
--------------
2,192,232
Home Building (0.6%)
---------------------------------------------------------------------------------
19,133 Castle & Cooke, Inc.+ 284,603
83,625 Clayton Homes, Inc. 1,578,422
--------------
1,863,025
Hospital Management (0.3%)
---------------------------------------------------------------------------------
28,116 Health Management Assoc., Inc. (New)+ 882,140
Household Products (0.7%)
---------------------------------------------------------------------------------
62,400 Blyth Industries, Inc.+ 1,996,800
Insurance (2.4%)
---------------------------------------------------------------------------------
20,427 Aegon N.V. (Netherlands) 877,621
25,648 Amerin Corp.+ 673,260
54,600 Jardine Matheson Holdings Ltd. (Singapore) 436,800
15,000 Mapfre Vida Seguros (Spain) 858,941
215 Munich Re (Germany)+ 441,101
134,270 Royal Insurance Holdings PLC (United Kingdom) 780,383
450 Swiss Reinsurance Co. (Registered) (Switzerland) 468,360
71,000 Tokio Marine & Fire Insurance Co. Ltd. (The) (Japan) 857,292
115,000 USF&G Corp. 1,725,000
--------------
7,118,758
Leisure (0.8%)
---------------------------------------------------------------------------------
34,000 Adidas AG 144A ADS (Germany)+ 1,079,500
6,500 Zodiac (France) 1,236,256
--------------
2,315,756
Lodging (1.2%)
---------------------------------------------------------------------------------
77,760 HFS, Inc.+ 3,615,840
Machinery (1.4%)
---------------------------------------------------------------------------------
46,000 Daikin Industries Ltd. (Japan) 476,707
69,000 Harnischfeger Industries, Inc. 2,613,375
20
<PAGE>
COMMON STOCKS
NUMBER OF SHARES VALUE
Machinery (continued)
58,400 Siebe PLC (United Kingdom) $ 722,672
100,869 Weir Group PLC (The) (United Kingdom) 380,023
--------------
4,192,777
Medical Equipment and Supplies (1.9%)
---------------------------------------------------------------------------------
16,075 Boston Scientific Corp.+ 771,600
11,700 Johnson & Johnson 1,093,950
20,820 Medtronic, Inc. 1,194,548
36,500 Sola International, Inc.+ 1,012,875
29,504 Stryker Corp. 1,600,592
--------------
5,673,565
Medical Supplies and Devices (1.2%)
---------------------------------------------------------------------------------
12,900 Shared Medical Systems Corp. 719,175
33,898 St. Jude Medical Inc.+ 1,279,650
20,300 Thermo Cardiosystems, Inc.+ 1,507,275
--------------
3,506,100
Metals and Mining (2.0%)
---------------------------------------------------------------------------------
66,100 Alumax, Inc.+ 2,387,863
73,144 Freeport-McMoRan Copper & Gold Co., Inc. Class B+ 2,386,323
685 N.V. Bekaert S.A. (Belgium) 644,818
5,340 SGL Carbon AG (Germany)+ 474,868
--------------
5,893,872
Networking Equipment (2.5%)
---------------------------------------------------------------------------------
30,798 Cabletron Systems, Inc.+ 2,313,700
38,700 Cisco Systems, Inc.+ 1,838,250
53,560 Stratacom, Inc.+ 2,142,400
9,100 U.S. Robotics Corp.+ 1,128,400
--------------
7,422,750
Office Equipment (0.6%)
---------------------------------------------------------------------------------
32,462 Viking Office Products, Inc.+ 1,846,276
Oil and Gas (1.7%)
---------------------------------------------------------------------------------
51,900 Burmah Oil PLC (United Kingdom) 835,386
80,500 Occidental Petroleum Corp. 1,851,500
30,000 Repsol S.A. (Spain) 1,093,637
11,000 Repsol S.A. ADS (Spain) 398,750
14,000 Shell Transportation & Trading (United Kingdom) 180,962
11,200 Societe Nationale Elf Aquitaine (Bearer) (France) 771,740
--------------
5,131,975
Paper (0.5%)
---------------------------------------------------------------------------------
42,400 Repola (Finland) 838,313
40,800 Svenska Cellulosa AB Ser. B (Sweden) 688,098
--------------
1,526,411
Pharmaceuticals and Biotechnology (3.2%)
---------------------------------------------------------------------------------
25,000 Astra B Free (Sweden) 1,142,836
13,910 Chiron Corp.+ 1,545,749
1,200 Ciba-Geigy AG (Switzerland) 1,070,108
21
<PAGE>
COMMON STOCKS
NUMBER OF SHARES VALUE
Pharmaceuticals and Biotechnology (continued)
---------------------------------------------------------------------------------
53,500 Pharmacia & Upjohn, Inc. $ 2,240,313
12,600 Pharmacia & Upjohn, Inc. Depository Shares (Sweden)+ 516,340
21,800 Warner-Lambert Co. 2,155,475
40,000 Yamanouchi Pharmaceutical Co. Ltd. (Japan) 893,706
--------------
9,564,527
Photography (0.7%)
---------------------------------------------------------------------------------
48,900 Polaroid Corp. 2,151,600
Publishing (0.8%)
---------------------------------------------------------------------------------
14,600 Singapore Press Holdings (Singapore) 294,772
63,200 Times Mirror Co. Class A 2,148,800
--------------
2,443,572
Railroads (0.3%)
---------------------------------------------------------------------------------
182 East Japan Railway Co. (Japan) 929,207
REITs (Real Estate Investment Trust) (2.7%)
---------------------------------------------------------------------------------
149,400 Debartolo Realty Corp. 1,942,200
69,000 Equity Residential Properties Trust 2,190,750
57,500 Meditrust Corp. 1,911,875
46,000 Nationwide Health Properties, Inc. 1,932,000
--------------
7,976,825
Real Estate (0.6%)
---------------------------------------------------------------------------------
446,000 Amoy Properties Ltd. (Hong Kong)+ 527,862
143,000 Cheung Kong Holdings Ltd. (Hong Kong) 994,212
111,000 Hong Kong Land Holdings Ltd. (Hong Kong) 240,870
--------------
1,762,944
Restaurants (1.4%)
---------------------------------------------------------------------------------
34,775 Boston Chicken, Inc.+ 1,247,553
17,600 Lone Star Steakhouse & Saloon+ 561,000
29,150 McDonald's Corp. 1,457,500
28,300 Outback Steakhouse, Inc.+ 1,004,650
--------------
4,270,703
Retail (4.9%)
---------------------------------------------------------------------------------
44,000 Cycle & Carriage Ltd. (Singapore) 495,608
28,700 Dayton Hudson Corporation 2,134,563
48,000 Heilig-Meyers Co. 672,000
23,050 Home Depot, Inc. (The) 996,913
18,000 Ito-Yokado Co., Ltd. (Japan) 1,006,275
310,400 K mart Corp. 2,172,800
60,900 Kroger Co.+ 2,260,913
1,200 MSC Industrial Direct Co., Inc. Class A+ 33,300
74,700 Melville Corp. 2,381,063
46,000 Penney (J.C.) Co., Inc. 2,185,000
234,800 Sears PLC (United Kingdom) 343,414
--------------
14,681,849
22
<PAGE>
COMMON STOCKS
NUMBER OF SHARES VALUE
Semiconductors (3.2%)
---------------------------------------------------------------------------------
9,120 Austria Mikro Systeme International (Austria) $1,330,294
36,800 Intel Corp. 2,164,300
45,364 Linear Technology Corp. 2,109,426
54,950 Maxim Integrated Products Inc.+ 1,991,938
17,000 Rohm Co. Ltd. (Japan) 1,010,173
23,900 SGS-Thomson Microelectronics ADR (France)+ 881,313
--------------
9,487,444
Specialty Consumer Products (0.3%)
---------------------------------------------------------------------------------
21,213 Department 56, Inc.+ 426,912
18,161 Sunglass Hut Intl.+ 503,968
--------------
930,880
Steel (0.4%)
---------------------------------------------------------------------------------
30,000 Danieli & Co. (Italy) 214,869
16,710 Nucor Corp. 900,251
--------------
1,115,120
Telecommunication Equipment (0.2%)
---------------------------------------------------------------------------------
16,600 Adtran, Inc.+ 717,950
Telephone Services (1.3%)
---------------------------------------------------------------------------------
90 Nippon Telegraph and Telephone Corp. (Japan) 684,541
11,200 Royal PTT (United Kingdom) 449,251
20,000 Securicor Group PLC Class A (United Kingdom) 285,778
25,000 Security Services PLC (United Kingdom) 361,051
34,100 Tele Danmark A/S ADS (Denmark) 1,005,950
263,126 Vodafone Group PLC (United Kingdom) 932,893
--------------
3,719,464
Telephone Utilities (0.1%)
---------------------------------------------------------------------------------
180,000 Hong Kong Telecommunications Ltd. (Hong Kong) 352,736
Textiles (0.6%)
---------------------------------------------------------------------------------
2,000 Chargeurs S.A. (France) 515,106
60,000 IRO AB (Sweden)+ 576,966
85,000 Toray Industries Inc. (Japan) 550,342
--------------
1,642,414
Tire and Rubber (0.5%)
---------------------------------------------------------------------------------
40,000 Bridgestone Corp. (Japan) 623,693
20,000 Michelin Corp. Class B (France) 894,700
--------------
1,518,393
Tobacco (2.2%)
---------------------------------------------------------------------------------
110,309 B A T Industries PLC (United Kingdom) 965,482
109,200 Dimon Inc. 2,170,350
23,000 Philip Morris Cos., Inc. 2,277,000
22,400 Tabacalera S.A. Ser. A (Spain) 984,596
--------------
6,397,428
23
<PAGE>
COMMON STOCKS
NUMBER OF SHARES VALUE
Transportation (0.2%)
--------------------------------------------------------------------------------------
28,000 Kamigumi Co. Ltd. (Japan) $ 271,534
32,500 Yamato Transport Co. Ltd. (Japan) 364,613
-------------
636,147
Water Utilities (0.5%)
--------------------------------------------------------------------------------------
34,000 Anglian Water PLC (United Kingdom) 295,243
30,000 Kurita Water Industries Ltd. (Japan) 767,256
44,829 North West Water Group PLC (United Kingdom) 398,203
-------------
1,460,702
Wireless Communications (0.5%)
--------------------------------------------------------------------------------------
56,300 Paging Network, Inc.+ 1,491,950
--------------------------------------------------------------------------------------
Total Common Stocks (cost $236,459,166) $278,718,190
--------------------------------------------------------------------------------------
CONVERTIBLE BONDS AND NOTES (0.7%)* (cost $2,151,631)
PRINCIPAL AMOUNT VALUE
$ 1,700,000 Lowes Companies Inc. cv. deb. 3s, 2003 $ 2,052,750
--------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.6%)* (cost $1,751,729)
NUMBER OF SHARES VALUE
53,100 Unisys Corp. Ser. A, $3.75 cv. pfd. $ 1,745,663
--------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (5.3%)* (cost $15,834,384)
PRINCIPAL AMOUNT VALUE
$15,832,000 Interest in $1,108,321,000 joint repurchase agreement
dated February 29, 1996 with Morgan (J.P.) & Co., Inc.
due March 1, 1996 with respect to various U.S.
Treasury obligations--maturity value of $15,834,384
for an effective yield of 5.42% $ 15,834,384
--------------------------------------------------------------------------------------
Total Investments (cost $256,196,910)*** $298,350,987
--------------------------------------------------------------------------------------
</TABLE>
* Percentages indicated are based on total net assets $297,093,042.
*** The aggregate identified cost for federal income tax purposes is
$257,133,637, resulting in gross unrealized appreciation and depreciation
of $45,609,869 and $4,392,519, respectively, or net unrealized
appreciation of $41,217,350.
+ Non-income-producing security.
(inverted triangle) Bankers Trust New York Corp. provides subcustodian
services to the fund.
Forward Currency Contracts to Sell at February 29, 1996
(Aggregate Face Value $29,007,796)
Aggregate
Market Face Delivery Unrealized
Value Value Date Appreciation
------------------------------------------------------------------------
British Pounds $ 5,212,049 $ 5,256,292 5/31/96 $ 44,243
French Francs 3,826,381 3,904,543 5/31/96 78,162
Japanese Yen 16,852,091 16,901,527 7/17/96 49,436
Netherland Guilders 2,854,736 2,945,434 5/31/96 90,698
------------------------------------------------------------------------
$262,539
------------------------------------------------------------------------
ADR or ADS after the name of a foreign holding stands for American Depository
Receipts or American Depository Shares, respectively, representing ownership
of foreign securities on deposit with a domestic custodian bank.
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.
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statement of assets and liabilities
February 29, 1996
<TABLE>
<S> <C>
Assets
----------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $256,196,910) (Note 1) $298,350,987
----------------------------------------------------------------------------------------------------------
Cash 25,392
----------------------------------------------------------------------------------------------------------
Dividends and interest receivables 400,390
----------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,019,504
----------------------------------------------------------------------------------------------------------
Receivable for securities sold 2,998,896
----------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 268,122
----------------------------------------------------------------------------------------------------------
Unamortized organization expense (Note 1) 68,131
----------------------------------------------------------------------------------------------------------
Other receivables 492,310
----------------------------------------------------------------------------------------------------------
Total assets 303,623,732
----------------------------------------------------------------------------------------------------------
Liabilities
----------------------------------------------------------------------------------------------------------
Payable for securities purchased 5,389,312
----------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 84,424
----------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 482,077
----------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 339
----------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,489
----------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 144,181
----------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 221,252
----------------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 98,304
----------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 5,583
----------------------------------------------------------------------------------------------------------
Other accrued expenses 103,729
----------------------------------------------------------------------------------------------------------
Total liabilities 6,530,690
----------------------------------------------------------------------------------------------------------
Net assets 297,093,042
----------------------------------------------------------------------------------------------------------
Represented by
----------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 246,422,561
----------------------------------------------------------------------------------------------------------
Accumulated net investment income (Note 1) 798,013
----------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign currency transactions (Notes 1
and 3) 7,456,727
----------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities in foreign
currencies 42,415,741
----------------------------------------------------------------------------------------------------------
Total--Representing net assets applicable to capital shares outstanding $297,093,042
----------------------------------------------------------------------------------------------------------
Computation of net asset value and offering price
----------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($142,512,748 divided by 12,931,633 shares) $11.02
----------------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $11.02)* $11.69
----------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($150,679,083 divided by 13,735,921 shares)** $10.97
----------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($3,901,211 divided by 354,181 shares) $11.01
----------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.5 of $11.01)* $11.41
----------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
25
<PAGE>
Statement of operations
Year ended February 29, 1996
Investment income:
-------------------------------------------------------------------------
Dividends (net of foreign tax of $189,392) $ 4,125,172
-------------------------------------------------------------------------
Interest 753,253
-------------------------------------------------------------------------
Total investment income 4,878,425
-------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,623,157
-------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,871
-------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 618,799
-------------------------------------------------------------------------
Distribution fees--class A (Note 2) 567,039
-------------------------------------------------------------------------
Distribution fees--class B (Note 2) 1,121,784
-------------------------------------------------------------------------
Distribution fees--class M (Note 2) 9,021
-------------------------------------------------------------------------
Administrative services (Note 2) 9,218
-------------------------------------------------------------------------
Reports to shareholders 77,316
-------------------------------------------------------------------------
Auditing 33,200
-------------------------------------------------------------------------
Legal 7,688
-------------------------------------------------------------------------
Postage 34,448
-------------------------------------------------------------------------
Registration fees 50,406
-------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 18,110
-------------------------------------------------------------------------
Other 26,966
-------------------------------------------------------------------------
Total expenses 4,209,023
-------------------------------------------------------------------------
Expense reduction (Note 2) (96,369)
-------------------------------------------------------------------------
Net expenses 4,112,654
-------------------------------------------------------------------------
Net investment income 765,771
-------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 17,048,318
-------------------------------------------------------------------------
Net realized gain on forward currency contracts and foreign
currency translation (Note 1) 1,512,006
-------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 40,066,295
-------------------------------------------------------------------------
Net unrealized appreciation on forward currency contracts
and foreign currency translation during the year 425,356
-------------------------------------------------------------------------
Net gain on investments 59,051,975
-------------------------------------------------------------------------
Net increase in net assets resulting from operations $59,817,746
-------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
For the period
July 1, 1994
(commencement
Year ended of operations) to
February 29 February 28
-----------------------------------
1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------
Net investment income $ 765,771 $ 216,104
- ----------------------------------------------------------------------------------------
Net realized gain (loss) on investment and
foreign currency transactions 18,560,324 (349,641)
- ----------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 40,491,651 1,924,090
- ----------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 59,817,746 1,790,553
- ----------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------
Class A (986,988) --
- ----------------------------------------------------------------------------------------
Class B (601,270) --
- ----------------------------------------------------------------------------------------
Class M (14,412) --
- ----------------------------------------------------------------------------------------
From net realized gain on investments
- ----------------------------------------------------------------------------------------
Class A (4,664,117) (176,618)
- ----------------------------------------------------------------------------------------
Class B (4,643,058) (140,189)
- ----------------------------------------------------------------------------------------
Class M (74,702) --
- ----------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 79,148,512 167,537,585
- ----------------------------------------------------------------------------------------
Total increase in net assets 127,981,711 169,011,331
- ----------------------------------------------------------------------------------------
Beginning of period 169,111,331 100,000
- ----------------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $798,013 and $43,669,
respectively) $297,093,042 $169,111,331
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period For the period For the period
July 3, 1995 July 1, 1994 July 1, 1994
(commencement Year (commencement Year (commencement
of operations) ended of operations) ended of operations)
to February 29 February 29 to February 28 February 29 to February 28
--------------------------------------------------------------------------------------
1996* 1996 1995* 1996 1995*
--------------------------------------------------------------------------------------
Class M Class B Class A
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.76 $ 8.80 $ 8.50 $ 8.83 $ 8.50
-------------------------------------------------------------------------------------------------------------
Investment operations
-------------------------------------------------------------------------------------------------------------
Net investment income -- .01 -- .06 .03
-------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain on
investments 1.72 2.60 .32 2.60 .32
-------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.72 2.61 .32 2.66 .35
-------------------------------------------------------------------------------------------------------------
Less distributions:
-------------------------------------------------------------------------------------------------------------
From net investment
income (.08) (.05) -- (.08) --
-------------------------------------------------------------------------------------------------------------
From net realized
gain (losses) on
investments (.39) (.39) -- (.39) --
-------------------------------------------------------------------------------------------------------------
In excess of net
realized loss on
investments -- -- (.02) -- (.02)
-------------------------------------------------------------------------------------------------------------
Total distributions (.47) (.44) (.02) (.47) (.02)
-------------------------------------------------------------------------------------------------------------
Net asset value, end
of period $11.01 $10.97 $8.80 $11.02 $8.83
-------------------------------------------------------------------------------------------------------------
Total investment
return at net asset
value (%) (a) 17.95(b) 30.05 3.77(b) 30.58 4.13(b)
-------------------------------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $3,901 $150,679 $75,998 $142,513 $93,144
-------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets
(%) (c) 1.23(b) 2.09 1.45(b) 1.56 1.12(b)
-------------------------------------------------------------------------------------------------------------
Ratio of net
investment income to
average net
assets (%) .00(b) .05 .05(b) .60 .37(b)
-------------------------------------------------------------------------------------------------------------
Portfolio Turnover
(%) 72.00 72.00 46.52(b) 72.00 46.52(b)
-------------------------------------------------------------------------------------------------------------
</TABLE>
* Per share net investment income for the period ended February 29, 1996
for class M and for the period ended February 28, 1995 for class A and
class B has been determined on the basis of the weighted average number
of shares outstanding during the period.
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the period ended February
29, 1996 includes amounts paid through brokerage service and expense
offset arrangements. Prior period ratios excluded these amounts
(Note 2).
28
<PAGE>
Notes to financial statements
February 29, 1996
Note 1
Significant accounting policies
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 primarily through a diversified portfolio consisting of
domestic growth, domestic value and international stocks.
The fund offers class A, class B, and class M shares. The fund commenced its
public offering of class M shares on July 3, 1995. 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
higher than class A shares and lower than class B 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 market value, which is determined using the last
reported sale price, or, if no sales are reported--as in the case of some
securities traded over the counter--the last reported bid price. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost, which approximates market value, and 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 managed by Putnam Investment Management, Inc.
("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of
Putnam Investments, Inc. and certain other accounts. 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 102% of the resale
29
<PAGE>
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 102% of 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 and 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, 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 and 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 fluctuations 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 gains and losses
on foreign currency transactions 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 is determined using 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) 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. Therefore, no provision has been made for
federal taxes on income, capital gains or unrealized appreciation on
securities held and for excise tax on income and capital gains.
30
<PAGE>
H) 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
semi-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 the
treatment of losses on wash sales transactions, non-taxable dividends,
realized and unrealized gains and losses on forward currency contracts, and
unrealized gains 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 February 29, 1996, the fund
reclassified $1,591,243 to decrease accumulated net investment loss and
$233,087 to decrease paid-in-capital, with a decrease to accumulated net
realized gains and losses of $1,358,156. The calculation of net investment
income per share in the financial highlights table excludes these
adjustments.
I) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public offering
of its shares were $98,304. These expenses are being amortized on a
straight-line basis over a five-year period. The fund will reimburse Putnam
Management for the payment of these expenses.
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: 0.70% of the
first $500 million of average net assets, 0.60% of the next $500 million,
0.55% of the next $500 million, and 0.50% of any amount over $1.5 billion,
subject, under current law, to reduction in any year to the extent that
expenses (exclusive of brokerage, interest, distribution fees and taxes) of
the fund exceed 2.5% of the first $30 million of average net assets, 2.0% of
the next $70 million and 1.5% of any amount over $100 million, and by the
amount of certain brokerage commissions and fees (less expenses) received by
affiliates of the Manager on the fund's portfolio transactions.
The fund also reimburses the Putnam Management 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.
Trustees of the fund receive an annual Trustee's fee of $930, and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
During the year ended February 29, 1996, the fund adopted a Trustee Fee
Deferral Plan (the "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 the fund or in other
Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are
31
<PAGE>
provided to the fund by Putnam Investor Services, a division of PFTC.
For the year ended February 29, 1996, fund expenses were reduced by $96,369
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 the assets
utilized in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
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 0.65%, 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 not to exceed 0.50%, 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 February 29, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $179,251 and $9,147 from the sale of
class A and class M shares, respectively and received $189,619 in contingent
deferred sales charges from the redemption 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 February 29, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received $480 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended February 29, 1996, purchases and sales of investment
securities other than short-term investments aggregated $228,330,663 and
$157,832,836 respectively. There were no purchases or 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 February 29, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
For the period July 1, 1994
(commencement of
operations) to
Year ended February 29 February 28
--------------------------------------------------------
1996 1995
------------------------------------------------------------------------------------------------------
Class A Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,339,724 $ 43,452,672 12,088,511 $105,678,204
Shares issued in connection with
reinvestment of distributions 527,586 5,444,673 19,922 170,381
------------------------------------------------------------------------------------------------------
4,867,310 48,897,345 12,108,433 105,848,585
Shares repurchased (2,485,011) (24,993,405) (1,564,981) (13,649,105)
------------------------------------------------------------------------------------------------------
Net increase 2,382,299 $ 23,903,940 10,543,452 $ 92,199,480
------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
For the period July 1,
1994
(commencement of
operations) to
Year ended February 29 February 28
------------------------- ------------------------
1996 1995
- ---------------------------------------------------------------------------------
Class B Shares Amount Shares Amount
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,296,911 $ 63,300,190 9,165,191 $80,027,296
Shares issued in
connection with
reinvestment of
distributions 478,659 4,925,411 15,669 133,658
- ---------------------------------------------------------------------------------
6,775,570 68,225,601 9,180,860 80,160,954
Shares repurchased (1,673,120) (16,711,682) (553,271) (4,822,849)
- ---------------------------------------------------------------------------------
Net increase 5,102,450 $ 51,513,919 8,627,589 $75,338,105
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the period July 3,
1995
(commencement of
operations) to
February 29
----------------------
1996
--------------------------------------------------
Class M Shares Amount
--------------------------------------------------
<S> <C> <C>
Shares sold 355,970 $3,752,562
Shares issued in
connection with
reinvestment of
distributions 8,554 88,276
--------------------------------------------------
364,524 3,840,838
Shares repurchased (10,343) (110,185)
--------------------------------------------------
Net increase 354,181 $3,730,653
--------------------------------------------------
</TABLE>
33
<PAGE>
Federal tax information (Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the fund hereby
designates $.023 per share (or if different, the amount necessary to offset
net capital gain earned by the fund) for all share classes as capital gain
dividends for its taxable year ended February 29, 1996.
The fund has designated 18.60% of the distributions from net investment
income as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1997 will show the tax status of all
distributions paid to your account in calendar 1996.
34
<PAGE>
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
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
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
John R. Verani
Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Brett C. Browchuk
Vice President
Thomas V. Reilly
Vice President
David L. King
Vice President and Fund Manager
John K. Storkerson
Vice President and Fund Manager
Charles H. Swanberg
Vice President and Fund Manager
William N. Shiebler
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Diversified
Equity Trust. 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.
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.
35
<PAGE>
P U T N A M I N V E S T M E N T S
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
24027-522/525/2AF 4/96
