Putnam
Diversified
Equity
Trust
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
2-28-99
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "We manage Putnam Diversified Equity Trust in a three-tiered fashion.
First, we target what we believe to be the world's most attractive
markets. Second, we analyze industry sectors to determine which offer the
most potential. Finally, we search for holdings on a stock-by-stock basis,
extensively researching a company's fundamentals and growth prospects. We
believe that through this actively managed, seamless process we can
constantly bring added value to the portfolio."
-- Paul Warren, manager
* Morningstar, Inc., an independent rating agency, gave Putnam Diversified
Equity Trust's class A shares its highest rating of 5 stars for overall
performance based on the 3-year period ended March 31, 1999. Of the 918
global equity funds rated, 10% received 5 stars.*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
20 Financial statements
* Past performance is not indicative of future results. Morningstar
ratings reflect risk-adjusted performance through 3/31/99 and are subject
to change every month. Morningstar ratings are calculated from a fund's
3-year return (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 3-year performance, the fund received 5 stars with 918
funds rated. 10% of the funds in an investment category receive 5 stars;
the next 22.5% receive 4 stars; the middle 35% receive 3 stars.
Performance of other share classes will vary.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Diversified Equity Trust delivered outstanding results during the
fiscal year ended February 28, 1999, the first full year employing its
broadened global investment strategy. The new strategy allows the managers
to seek out companies anywhere in the world whose stocks they believe
offer not only attractive valuations but growth potential. Given the
tumultuous state of the world's equity markets over the past year and a
half, the shift was fortuitous indeed.
I am pleased to announce the recent appointment of two new members to the
management team. Michael K. Arends joined Putnam in 1997 from Phoenix Duff
and Phelps and had previously worked with Kemper Financial Services,
Institutional Capital Corp., and Mathers and Co. He has 22 years of
investment experience. Michael P. Stack also joined Putnam in 1997; his 14
years of investment experience include employment with Independence
Investment Associates and National Life Investment Management.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
April 21, 1999
Report from the Fund Managers
Justin M. Scott
Omid Kamshad
Paul C. Warren
Robert R. Beck
Michael K. Arends
Michael P. Stack
In the 12 months ended February 28, 1999, investors witnessed firsthand
how truly interdependent the world's financial markets have become.
Unsettled financial, economic, and political conditions created an
unpredictable global investment environment with many contrasting
influences. On the downside, the collapse of the Russian ruble, Asia's
ongoing fiscal turmoil, and the imminent devaluation of the Brazilian real
caused markets worldwide to plummet. On the upside, the Federal Reserve
Board cut interest rates three times to help inject liquidity into the
global marketplace, the U.S. economy continued to grow without signs of
inflation, and the euro was successfully launched -- three positive events
that helped to restore confidence in the markets.
Amid this volatile environment, Putnam Diversified Equity Trust maintained
its seamless global approach to pursuing capital appreciation, posting
solid gains by period's end. The fund's class A shares returned a total of
13.08% at net asset value and 6.60% at public offering price. More
complete performance information, including the performance of other share
classes, can be found on pages 9 and 10 of this report.
* VALUATION APPROACH EXPANDS FUND'S POTENTIAL
As noted in the semiannual report, four months into the fiscal year we
made changes in the fund's stock selection process and overall asset
allocation. We expanded the fund's ability to invest in foreign markets
while at the same time dissolving the distinction between the fund's
domestic value and domestic growth sectors.
Our goal was to enhance the fund's capacity to focus on stocks that offer
both attractive valuations and growth potential on a global basis. Using a
valuation approach, we now analyze a stock's current price in relation to
the corporation's assets and the return we expect them to earn. If a
company's current stock price is considerably less than its potential
relative payback, we will consider purchasing the stock for the fund.
Since we instituted this price-to-payback method of stock selection across
the portfolio, your fund's competitive performance has improved
substantially.
* U.S. REMAINS ANCHOR MARKET THOUGH WEIGHTING REDUCED
Since the outset of fiscal 1999, we have selectively trimmed back the
fund's exposure to U.S. stocks, locking in profits and shifting the
allocation balance to opportunities in other regions of the world. While
the United States remains the fund's largest country weighting, roughly
46% of the fund's net assets were invested in the U.S. market at the
fiscal year's end, down from 68% earlier in the period. Positions we
reduced and/or eliminated included the fund's holdings in Cisco, Ascend
Communications, and Texas Instruments, all of which produced considerable
gains.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Telecommunications 17.2%
Pharmaceuticals and
biotechnology 8.8%
Financial services 7.6%
Retail 7.3%
Banks 6.2%
Footnote reads:
*Based on net assets as of 2/28/99. Holdings will vary over time.
Our focus on the domestic market served the fund well as corporate America
repeatedly affirmed its resilience. It also gave the fund a strategic
advantage when global markets experienced, in tandem, unprecedented panic
selling in August, September, and part of October. Though not immune to
the volatility, the U.S. market fared better than most other markets and
was able to rebound quickly.
The assets we took from the U.S. market were redeployed, for the most
part, to European markets that stood to benefit from the implementation of
Europe's Economic and Monetary Union (EMU) on January 1, 1999. At the
beginning of the fiscal year, we targeted stocks of companies based in
France, the Netherlands, and Italy. In the second half of the period, we
increased the fund's exposure to the United Kingdom, reduced its German
position, and slightly scaled back on investments in France. Also caught
in the global downdraft in the fall, European markets have yet to recover
as fully as those in the United States, particularly when returns are
calculated in U.S. dollar terms. Consequently, we believe there is room
for a substantial increase in value in a number of the Continent's
markets.
The United Kingdom was among one of Europe's weakest performers in 1998.
We attribute this, in part, to its decision not to participate in EMU,
which meant that it also did not participate in the runup of stock prices
that preceded the introduction of the euro. Because the United Kingdom was
also the first to enter into a recession, we believe it will be among the
first to lower interest rates and stimulate growth in additional ways.
British Telecom and WPP Group were among the fund's newly purchased
holdings in this market. While these holdings, as well as others discussed
in this report, were viewed favorably at the end of the period, all
holdings are subject to review and adjustment in accordance with the
fund's investment strategy and may well vary in the future.
The German economy is also comparatively weaker than most other European
economies, and the German market was not as great a beneficiary of the
uptrend that anticipated EMU as the markets of some of Europe's peripheral
countries. Stock valuations in Germany began to look a bit stretched to us
and we decided it was time to realize profits and sell some holdings,
including Deutsche Telecom. The slight reduction we made in the fund's
French holdings was primarily due to the selling of Total, an energy
company, in favor of Chevron in the U.S. We also trimmed back our holdings
in ING in the Netherlands to realize gains.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Telecom Italia SPA (Italy)
Telecommunications
Pharmacia & Upjohn, Inc.
Pharmaceuticals and biotechnology
Tyco International Ltd.
Conglomerates
Citigroup, Inc.
Financial services
MCI WorldCom, Inc.
Telecommunications
Nokia Oyj AB Class A (Finland)
Telecommunications
Microsoft Corp.
Computer software
Sprint Corp.
Telecommunications
National Westminster Bancorp Inc. (United Kingdom)
Banks
Wal-Mart Stores, Inc.
Retail
Footnote reads:
These holdings represent 17.8% of the fund's net assets as of 2/28/99.
Portfolio holdings will vary over time.
On the other side of the globe, Japanese stocks may hold promise yet. For
some time now, we have kept the fund's investments in Japan to a carefully
researched minimum. In the final few weeks of the fiscal year, however, we
took a more positive stance on that market's prospects and added new
holdings. Although the situation remains quite tenuous, there appears to
be change afoot in how corporate Japan is addressing shareholder value.
With a seemingly firm resolve to focus on future profitability, many firms
are taking steps to restructure. Furthermore, Japanese stock valuations
are among the most attractive in the developed world. These considerations
make the case for investing in certain well-researched companies, such as
NTT and Matsushita Electric, a compelling one.
* TELECOMMUNICATIONS HOLDINGS DOMINATE PORTFOLIO
Investing in a variety of countries is just one of several ways in which
we diversify your investment. We also spread risk and maximize growth
potential by analyzing a broad range of industry sectors and by examining
hundreds of individual stocks. Throughout the period, telecommunications
holdings, primarily in the United States and secondarily in Europe, made
up the bulk of the fund's net assets. In fact, Telecom Italia was the
fund's largest holding at the end of the fiscal year. The proliferation of
wireless and data technology and the industry's long-term growth prospects
make it an attractive investment regardless of market cycles. Finance,
electronics, pharmaceuticals, and retail were also key portfolio sectors.
* FISCAL 1999 PROMISES MORE UNCERTAINTY -- ALONG WITH REASONS FOR OPTIMISM
If fiscal 1998 taught investors anything, it is to expect the unexpected.
As of this writing, fiscal 1999 seems poised to provide more of the same.
There exists much uncertainty and risk in the global financial marketplace
- -- the Far East and Latin America come to mind -- and therefore a
disciplined investment strategy and a strong commitment to sound research
are critical to success. In general, we are optimistic that the
fundamentals of the U.S. and European markets will reward investors in the
long run, although possible short-term bouts of volatility may cast a
shadow of doubt on the markets' potential. We will continue our
painstaking evaluation of political, economic, and financial data from
countries around the world as we reallocate your fund's assets to capture
profits and pursue new opportunities.
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 2/28/99, there is no guarantee the fund will
continue to hold these securities in the future. International investing
involves certain risks, such as currency fluctuations, economic
instability, and political developments, not present with domestic
investments.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Diversified Equity Trust is designed for investors seeking capital
appreciation through a diversified portfolio consisting primarily of
domestic and international stocks.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 2/28/99
Class A Class B Class C Class M
Inception dates (7/1/94) (7/1/94) (2/1/99) (7/3/95)
NAV POP NAV CDSC NAV CDSC NAV POP
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 13.08% 6.60% 12.33% 7.33% 12.53% 11.53% 12.61% 8.63%
- --------------------------------------------------------------------------------------
Life of fund 129.61 116.38 123.66 121.66 123.33 123.33 126.29 118.35
Annual average 19.53 18.01 18.86 18.63 18.82 18.82 19.15 18.24
- --------------------------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 2/28/99
Standard & MSCI
Poor's MSCI All-Country
500 Index EAFE Index World Index
- ------------------------------------------------------------------------------
1 year 19.74% 4.95% 9.06%
- ------------------------------------------------------------------------------
Life of fund 205.69 38.89 73.46
Annual average 27.08 7.30 12.54
- ------------------------------------------------------------------------------
Past performance is not indicative of future results. More recent returns
may be more or less than those shown. 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-year 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 M shares for periods prior
to its inception are derived from the historical performance of class A
shares, adjusted to reflect the initial sales charge currently applicable
to the class and, in the case of class M shares, the higher operating
expenses applicable to such shares. For class C shares, returns for
periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the CDSC currently
applicable to class C shares, which is 1% for the first year and is
eliminated thereafter, and the higher operating expenses applicable to
class C 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
7/1/94
Fund's class A MSCI All-Country MSCI S&P 500
Date shares at POP World Index EAFE Index Index
7/1/94 9,425 10,000 10,000 10,000
2/28/95 9,814 9,936 9,500 11,128
2/29/96 12,815 11,942 11,101 14,989
2/28/97 14,983 13,324 11,460 18,911
2/28/98 19,139 15,905 13,234 25,530
2/28/99 $21,638 $17,346 $13,889 $30,569
Footnote reads:
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 $22,366 (the value of class B shares with a redemption at
the end of the period is $22,166) a $10,000 investment in the fund's class
M shares would have been valued at $22,629 ($21,835 at public offering
price); a $10,000 investment in the fund's class C shares would have been
valued at $22,333 (no sales charge would apply). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 2/28/99
Class A Class B Class C Class M
- ------------------------------------------------------------------------------
Distributions 1 1 -- 1
- ------------------------------------------------------------------------------
Income $ -- $ -- -- $ --
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term 1.170 1.170 -- 1.170
- ------------------------------------------------------------------------------
Short-term 0.067 0.067 -- 0.067
- ------------------------------------------------------------------------------
Total $1.237 $1.237 -- $1.237
- ------------------------------------------------------------------------------
Share value NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
2/28/98 $13.18 $13.98 $13.07 -- $13.11 $13.59
- ------------------------------------------------------------------------------
2/1/99* -- -- -- $14.15 -- --
- ------------------------------------------------------------------------------
2/28/99 13.62 14.45 13.40 13.63 13.48 13.97
- ------------------------------------------------------------------------------
* Inception date of class C shares.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 3/31/99
(most recent calendar quarter)
Class A Class B Class C Class M
Inception dates (7/1/94) (7/1/94) (2/1/99) (7/3/95)
NAV POP NAV CDSC NAV CDSC NAV POP
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 11.78% 5.34% 11.00% 6.00% 11.13% 10.13% 11.26% 7.38%
- ---------------------------------------------------------------------------------------
Life of fund 139.56 125.75 133.17 131.17 132.67 132.67 135.86 127.58
Annual average 20.19 18.70 19.51 19.29 19.46 19.46 19.80 18.90
- ---------------------------------------------------------------------------------------
</TABLE>
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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.
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 C shares are not subject to an initial sales charge and are subject
to a contingent deferred sales charge only if the shares are redeemed
during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no 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 5.75% maximum 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 or class C shares and assumes redemption at the
end of the period. For class B shares, the 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. The CDSC for class C shares is 1% for one year
after purchase.
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 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.
Morgan Stanley Capital International (MSCI) All-Country World Index* is an
unmanaged list of global equity securities, with all values expressed in
U.S. dollars.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended February 28, 1999
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 (the "fund") at February 28, 1999, 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 28, 1999 by
correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 1999
<TABLE>
<CAPTION>
Portfolio of investments owned
February 28, 1999
COMMON STOCKS (97.4%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Advertising (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
971,800 WPP Group PLC (United Kingdom) $ 7,691,669
Apparel (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
68,600 Gucci Group N.V. (Netherlands) 4,802,000
Automotive (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
39,860 General Motors Corp. 3,290,941
83,012 Volkswagen AG (Germany) 3,273,767
--------------
6,564,708
Banks (6.2%)
- --------------------------------------------------------------------------------------------------------------------------
176,852 Allied Irish Banks PLC (Ireland) 3,078,159
216,400 Banca Popolare di Bergamo SPA (Italy) 5,673,593
189,038 Banca Popolare di Brescia SPA (Italy) 5,810,015
710 Bank of Nova Scotia (Canada) 14,651
60,969 Banque Nationale de Paris (France) 4,882,783
97,700 BB&T Corp. 3,700,876
256,000 Development Bank of Singapore Ltd. (Singapore) 1,858,304
55,000 Fifth Third Bancorp 3,633,300
220,200 Istituto Bancario San Paolo di Torino (Italy) (NON) 3,856,900
561,373 National Westminster Bancorp Inc. (United Kingdom) 11,620,659
--------------
44,129,240
Broadcasting (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
75,300 CBS Corp. 2,776,688
200,925 News Corp. Ltd. ADR (Australia) 5,701,247
95,700 Tele-Comm Liberty Media Group, Inc. Class A (NON) 5,155,838
26,500 Television Francaise I (France) 4,758,361
--------------
18,392,134
Building and Construction (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
24,471 Bouygues S.A. (France) 6,105,818
Building Products (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
238,934 CRH PLC (Ireland) 4,448,244
15,030 Lafarge Coppee (France) 1,432,185
--------------
5,880,429
Business Services (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
460,800 Cendant Corp. (NON) 7,632,000
52,000 Pitney Bowes, Inc. 3,285,750
294,196 Securicor Group PLC (United Kingdom) 2,838,771
221,559 Vedior NV (Netherlands) 4,722,743
--------------
18,479,264
Cable Television (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
160,800 MediaOne Group Inc. (NON) 8,763,600
178,704 Tele-Communications, Inc. Class A (NON) 11,224,845
--------------
19,988,445
Cellular Communications (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
165,493 Hellenic Telecommunication Organization S.A. (Greece) 4,377,908
592,400 Orange PLC ADR (United Kingdom) (NON) 8,575,510
167,650 Sprint PCS (NON) 5,364,800
39,900 Telesp Celular Participacoes S.A. ADR (Brazil) 837,900
--------------
19,156,118
Chemicals (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
137,200 Akzo-Nobel N.V. (Netherlands) 5,221,870
224,700 Hoechst AG (Germany) 10,631,393
174,000 Shin-Etsu Chemical Co. (Japan) 4,064,873
--------------
19,918,136
Computer Services (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
215,500 Electronic Data Systems Corp. 10,020,750
Computer Software (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
78,708 Microsoft Corp. (NON) 11,816,039
132,300 Parametric Technology Corp. (NON) 2,034,113
--------------
13,850,152
Computers (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
163,400 Compaq Computer Corp. 5,759,850
309,000 Fujitsu Ltd. (Japan) 3,843,025
30,500 IBM Corp. 5,185,000
--------------
14,787,875
Conglomerates (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
437,366 Granada Group PLC (United Kingdom) 8,818,911
300,000 Hutchison Whampoa, Ltd. (Hong Kong) 2,081,451
179,769 Tyco International Ltd. 13,381,555
--------------
24,281,917
Cosmetics (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
129,000 Shiseido Co., Ltd. (Japan) 1,561,008
Electric Utilities (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
89,200 Electricidade de Portugal S.A. (Portugal) (NON) 1,929,880
297,172 Iberdola S.A. (Spain) 4,664,947
--------------
6,594,827
Electronics and Electrical Equipment (4.0%)
- --------------------------------------------------------------------------------------------------------------------------
75,000 Advantest Corp. (Japan) 5,678,571
125,600 ASM Lithography Holding N.V. (Netherlands) (NON) 5,181,618
100,000 Matsushita Electric Industrial Co. 1,668,067
60,200 Motorola, Inc. 4,229,050
131,845 Samsung Electronics Co. (South Korea) (NON) 9,296,602
91,700 Seagate Technology, Inc. (NON) 2,653,569
--------------
28,707,477
Entertainment (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
46,900 Viacom, Inc. Class B (NON) 4,144,788
Environmental Control (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
27,615 Vivendi (France) 7,224,912
Financial Services (7.6%)
- --------------------------------------------------------------------------------------------------------------------------
33,100 American Express Co. 3,591,350
4,392 Cie Finance Richemont (Switzerland) 6,655,466
217,300 Citigroup, Inc. 12,766,375
2,019 Julius Baer Holdings AG (Switzerland) 6,148,366
47,900 Merrill Lynch & Co., Inc. 3,676,325
57,200 Morgan Stanley, Dean Witter, Discover and Co. 5,176,600
1,717,000 Nikko Securities Co. Ltd. (Japan) 5,410,713
33,825 UBS AG (Switzerland) (NON) 10,555,684
--------------
53,980,879
Food and Beverages (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
408,788 Diageo PLC (United Kingdom) 4,515,950
11,900 Groupe Danone (France) 2,974,441
42,450 Huhtamaki I Free (Finland) 1,421,125
--------------
8,911,516
Insurance (4.5%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 AFLAC Inc. 3,530,000
508,795 Allied Zurich AG (United Kingdom) (NON) 7,511,981
45,700 American International Group, Inc. 5,206,944
68,732 Axa S.A. (France) 8,994,962
89,919 Internationale Nederlanden Groep (Netherlands) 5,051,793
43,700 Sampo Insurance Co., Ltd. Class A (Finland) 1,449,012
--------------
31,744,692
Machinery (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
63,608 Mannesmann AG (Germany) 8,569,631
Networking Equipment (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
172,800 3Com Corp. (NON) 5,432,400
38,100 Ascend Communications, Inc. (NON) 2,931,319
--------------
8,363,719
Oil and Gas (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
53,082 BP Amoco PLC ADR (United Kingdom) 4,511,987
25,255 Chevron, Inc. 1,941,478
247,800 Conoco, Inc. 5,033,438
65,500 Elf Aquitaine S.A. (France) 6,854,706
--------------
18,341,609
Paper (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
42,600 Willamette Industries, Inc. (NON) 1,552,238
Pharmaceuticals and Biotechnology (8.8%)
- --------------------------------------------------------------------------------------------------------------------------
63,300 American Home Products Corp. 3,766,350
84,000 Lilly Eli & Co. 7,953,750
109,000 Merck & Co., Inc. 8,910,750
700 Novartis AG ADR (Switzerland) 1,231,248
62,400 Pfizer, Inc. 8,232,900
261,718 Pharmacia & Upjohn, Inc. 14,263,631
163,500 Schering-Plough Corp. 9,145,781
59,800 Warner-Lambert Co. 4,129,938
168,000 Yamanouchi Pharmaceutical Co., Ltd. (Japan) 5,110,587
--------------
62,744,935
Photography (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
139,200 Canon, Inc. (Japan) 2,971,159
Publishing (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
49,800 McGraw-Hill, Inc. 5,449,988
Recreation (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
509,500 EMI Group PLC (United Kingdom) 3,761,199
Restaurants (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
47,400 McDonald's Corp. 4,029,000
67,800 Tricon Global Restaurants, Inc. (NON) 4,203,600
--------------
8,232,600
Retail (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
45,600 Albertson's Inc. 2,599,200
200,000 Ahold Koninklijke N.V. (Netherlands) 7,711,200
30 Circle K Japan Co. Ltd. (Japan) 1,339
748,800 Coles Myer Ltd. (Australia) 3,978,434
94,440 Costco Companies, Inc. (NON) 7,584,713
58,100 Dayton Hudson Corp. 3,634,881
260,525 Dixons Group PLC (United Kingdom) 4,910,866
60,000 Laurus N.V. (Netherlands) 1,718,496
115,550 Rite Aid Corp. 4,780,881
97,000 Saks, Inc. (NON) 3,485,938
130,200 Wal-Mart Stores, Inc. 11,246,025
--------------
51,651,973
Semiconductors (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
44,900 Intel Corp. 5,385,194
400 Rohm Co. Ltd. (Japan) 38,992
46,376 STMicroelectronics (France) (NON) 4,145,775
52,000 Texas Instruments, Inc. 4,637,750
--------------
14,207,711
Telecommunications (17.2%)
- --------------------------------------------------------------------------------------------------------------------------
54,200 Ameritech Corp. 3,543,325
802 BCE, Inc. (Canada) (NON) 32,460
456,355 British Telecommunications PLC (United Kingdom) 7,903,969
544,800 Cable & Wireless Communications (United Kingdom) 6,459,301
95,400 Cable & Wireless PLC (United Kingdom) 1,304,574
1,184,000 China Telecom Ltd. (Hong Kong) (NON) 2,101,459
56,080 France Telecom S.A. (France) 5,266,551
400 Korea Telecom Corp. (South Korea) (NON) 11,779
147,600 MCI WorldCom, Inc. (NON) 12,177,000
500 Nippon Telegraph and Telephone Corp. (Japan) 4,109,243
87,597 Nokia Oyj AB Class A (Finland) 12,023,508
184,329 Portugal Telecom S.A. (Portugal) 9,058,365
10,800 QUALCOMM, Inc. (NON) 788,400
136,300 Sprint Corp. 11,696,244
20,700 Swisscom AG ADR (Switzerland) (NON) 8,207,238
1,429,500 Telecom Italia SPA (Italy) 15,101,723
361,325 Tele-Communications TCI Ventures Group Class A (NON) 10,004,186
18,880 Telefonaktiebolaget LM Ericsson Class B (Sweden) 502,325
34,900 Telefonos de Mexico S.A. ADR Class L (Mexico) 1,995,844
205,900 Telfonica de Espana (Spain) 9,435,742
--------------
121,723,236
Transportation (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
191,723 TNT Post Group N.V. (Netherlands) 6,578,944
--------------
Total Common Stocks (cost $580,261,485) $ 691,067,696
SHORT-TERM INVESTMENTS (1.2%) (a) (cost $8,535,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 8,535,000 Interest in $310,913,000 joint repurchase agreement
dated February 26, 1999 with SBC Warburg
Securities due March 1, 1999 with respect to
various U.S. Treasury obligations -- maturity
value of $8,538,371 for an effective yield of 4.74% $ 8,535,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $588,796,485) (b) $ 699,602,696
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $709,515,758.
(b) The aggregate identified cost on a tax basis is $590,531,786, resulting in gross unrealized appreciation and
depreciation of $124,253,412 and $15,182,502, respectively, or net unrealized appreciation of $109,070,910.
(NON) Non-income-producing security.
ADR after the name of a foreign holding stands for American Depository Receipts representing ownership of
foreign securities on deposit with a domestic custodian bank.
Diversification by Country (Unaudited)
Distribution of investments by country of issue at February 28, 1999: (as percentage of Market Value)
Australia 1.4%
Finland 2.2
France 7.6
Germany 3.3
Ireland 1.1
Italy 4.4
Japan 4.7
Netherlands 6.0
Portugal l1.6
South Korea 1.3
Spain 2.0
Switzerland 4.8
United Kingdom 11.6
United States 46.0
Other 2.0
-----
Total 100.0%
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at February 28, 1999
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- -------------------------------------------------------------------------------
British Pounds $20,810,244 $21,169,434 7/99 $359,190
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
February 28, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $588,796,485) (Note 1) $699,602,696
- -----------------------------------------------------------------------------------------------
Cash 2,514
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $2,646) 34,673
- -----------------------------------------------------------------------------------------------
Dividends and other receivables 442,845
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 704,784
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 29,731,428
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 359,190
- -----------------------------------------------------------------------------------------------
Total assets 730,878,130
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 16,484,030
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 904,488
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,162,509
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 195,119
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 17,955
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,721
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 492,593
- -----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 2,003,716
- -----------------------------------------------------------------------------------------------
Other accrued expenses 100,241
- -----------------------------------------------------------------------------------------------
Total liabilities 21,362,372
- -----------------------------------------------------------------------------------------------
Net assets $709,515,758
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $559,057,505
- -----------------------------------------------------------------------------------------------
Accumulated net investment loss (Note 1) (359,190)
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 39,566,399
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets
and liabilities in foreign currencies 111,251,044
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $709,515,758
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($302,556,415 divided by 22,212,049 shares) $13.62
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $13.62)* $14.45
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($377,386,047 divided by 28,154,118 shares)** $13.40
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($189,676 divided by 13,918 shares)** $13.63
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($29,383,620 divided by 2,179,428 shares) $13.48
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $13.48)* $13.97
- -----------------------------------------------------------------------------------------------
* 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 February 28, 1999
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $470,978) $ 7,550,847
- -----------------------------------------------------------------------------------------------
Interest 1,732,911
- -----------------------------------------------------------------------------------------------
Total investment income 9,283,758
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,487,302
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,321,269
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 22,612
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 10,550
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 969,992
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 3,551,585
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 38
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 206,632
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 29,035
- -----------------------------------------------------------------------------------------------
Reports to shareholders 39,721
- -----------------------------------------------------------------------------------------------
Registration fees 18,096
- -----------------------------------------------------------------------------------------------
Auditing 37,014
- -----------------------------------------------------------------------------------------------
Legal 5,715
- -----------------------------------------------------------------------------------------------
Postage 105,689
- -----------------------------------------------------------------------------------------------
Other 14,028
- -----------------------------------------------------------------------------------------------
Total expenses 10,819,278
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (169,824)
- -----------------------------------------------------------------------------------------------
Net expenses 10,649,454
- -----------------------------------------------------------------------------------------------
Net investment loss (1,365,696)
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 66,230,987
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (2,228,124)
- -----------------------------------------------------------------------------------------------
Net realized gain on swap contracts (Note 1) 20,238,345
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period (Note 1) 536,983
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
during the year (4,274,115)
- -----------------------------------------------------------------------------------------------
Net gain on investments 80,504,076
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $79,138,380
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended February 28
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment loss $ (1,365,696) $ (833,163)
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions 84,241,208 82,343,328
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (3,737,132) 47,865,260
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 79,138,380 129,375,425
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A -- (822,276)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (334,603)
- ---------------------------------------------------------------------------------------------------------------
Class C -- --
- ---------------------------------------------------------------------------------------------------------------
Class M -- (52,099)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (26,234,811) (29,056,997)
- ---------------------------------------------------------------------------------------------------------------
Class B (33,206,052) (35,955,231)
- ---------------------------------------------------------------------------------------------------------------
Class C -- --
- ---------------------------------------------------------------------------------------------------------------
Class M (2,470,012) (2,675,739)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (1,034,844)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (421,101)
- ---------------------------------------------------------------------------------------------------------------
Class C -- --
- ---------------------------------------------------------------------------------------------------------------
Class M -- (65,568)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 62,966,169 124,152,859
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 80,193,674 183,109,826
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 629,322,084 446,212,258
- ---------------------------------------------------------------------------------------------------------------
End of year (including accumulated net investment loss
and distributions in excess of net investment income of
$359,190 and $522,224, respectively) $709,515,758 $629,322,084
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended July 1, 1994+
operating performance Year ended Feb. 28 Feb. 29 to Feb. 28
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.18 $11.85 $11.02 $8.83 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .02(c) .03(c) .06(c) .06 .03(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.66 3.06 1.77 2.60 .32
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.68 3.09 1.83 2.66 .35
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.05) (.12) (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.24) (1.66) (.83) (.39) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.05) (.05) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- -- -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.24) (1.76) (1.00) (.47) (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.62 $13.18 $11.85 $11.02 $8.83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 13.08 27.74 16.92 30.58 4.13*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $302,556 $270,536 $199,305 $142,513 $93,144
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.26 1.37 1.43 1.56 1.12*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) .17 .20 .48 .60 .37*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 241.46 97.77 82.07 72.00 46.52*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended February 29, 1996 and thereafter
includes amounts paid through brokerage service and expense offset 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.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended July 1, 1994+
operating performance Year ended Feb. 28 Feb. 29 to Feb. 28
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.07 $11.77 $10.97 $8.80 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.07)(c) (.06)(c) (.01)(c) .01 --(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.64 3.05 1.76 2.60 .32
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.57 2.99 1.75 2.61 .32
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.01) (.09) (.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.24) (1.66) (.83) (.39) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.02) (.03) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- -- -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.24) (1.69) (.95) (.44) (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.40 $13.07 $11.77 $10.97 $8.80
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 12.33 26.98 16.19 30.05 3.77*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $377,386 $333,642 $232,117 $150,679 $75,998
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.92 2.00 2.02 2.09 1.45*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) (.49) (.44) (.12) .05 .05*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 241.46 97.77 82.07 72.00 46.52*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended February 29, 1996 and thereafter
includes amounts paid through brokerage service and expense offset 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.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share February 1, 1999+
operating performance to February 28
- ------------------------------------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $14.15
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) --(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments (.52)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.52)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.63
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (3.68)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $190
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .15*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) (.05)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 241.46
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended February 29, 1996 and thereafter
includes amounts paid through brokerage service and expense offset 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.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 3, 1995+
operating performance Year ended Feb. 28 to Feb. 29
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $13.11 $11.80 $11.01 $9.76
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.03)(c) (.03)(c) .01(c) --(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.64 3.07 1.78 1.72
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.61 3.04 1.79 1.72
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.03) (.12) (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.24) (1.66) (.83) (.39)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) (.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.24) (1.73) (1.00) (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.48 $13.11 $11.80 $11.01
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 12.61 27.36 16.51 17.95*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $29,384 $25,145 $14,791 $3,901
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.67 1.75 1.77 1.23*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) (.25) (.22) .05 --*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 241.46 97.77 82.07 72.00
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended February 29, 1996 and thereafter
includes amounts paid through brokerage service and expense offset 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.
</TABLE>
Notes to financial statements
February 28, 1999
Note 1
Significant accounting policies
Putnam Diversified Equity Trust ("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 and
international stocks.
The fund offers class A, class B, class C and class M shares. The fund
began offering class C shares on February 1, 1999. 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 C shares are
subject to the same fees and expenses as class B shares, except that class
C shares have a one-year 1.00% contingent deferred sales charge and do not
convert to class A shares. 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 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 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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are 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 realized 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) Swap contracts The fund may engage in swap agreements, which are an
agreement to exchange the return generated by one instrument for the
return generated by another instrument. The fund may enter into equity
swap agreements, to manage its exposure to equity markets, which involve a
commitment by one party to pay interest in exchange for a market linked
return based on a notional amount. To the extent that the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the fund will receive a payment
from or make a payment to the counterparty, respectively. Equity swaps are
marked to market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss. Payments received
or made at the end of the measurement period are recorded as realized
gains or losses. The fund could be exposed to credit or market risk due to
unfavorable changes in the fluctuations of interest rates or in the price
of the underlying security or index, the possibility that there is no
liquid market for these agreements or that the counterparty may default on
its obligation to perform.
H) 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
February 28, 1999, the fund had no borrowings against the line of credit.
I) 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.
J) 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 losses on wash sale transactions, foreign
currency gains and losses, organization costs, nontaxable dividends,
realized gains and losses on passive foreign investment companies 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 28,
1999, the fund reclassified $1,528,730 to decrease accumulated net
investment loss and $284,469 to increase paid-in-capital, with a decrease
to accumulated net realized gains of $1,813,199. The calculation of net
investment income per share in the financial highlights table excludes
these adjustments.
K) 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 have been fully
amortized on a straight-line basis over a five-year period as of February
28, 1999.
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.
Such fee is based on the following annual rates: 0.70% of the first $500
million of average net assets, 0.60% of the next $500 million, 0.55% of
the next $500 million, 0.50% of the next $5 billion, 0.475% of the next $5
billion, 0.455% of the next $5 billion, 0.44% of the next $5 billion, and
0.43% thereafter.
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 Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended February 28, 1999, fund expenses were reduced by
$169,824 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 $950 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, class C 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%,
1.00% and 1.00% of the average net assets attributable to class A, class
B, class C and class M shares, respectively. The Trustees currently limit
payment by the fund to an annual rate of 0.75% of the average net assets
attributable to class M shares. The Trustees currently limit payment by
the fund to an annual rate of 0.50% of the average net assets attributable
to class A for shares outstanding as of July 1, 1995 (except for class A
shares for which Putnam Mutual Funds is dealer of record) and 0.25% of
such average net asset value of shares acquired after that date (including
shares acquired through reinvestment of distributions).
For the year ended February 28, 1999, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $191,156 and $23,825 from the sale
of class A and class M shares, respectively and received $435,135 and $0
in contingent deferred sales charges from redemptions of class B and class
C shares, respectively. A deferred sales charge of up to 1% is assessed on
certain redemptions of class A shares. For the year ended February 28,
1999, Putnam Mutual Funds Corp., acting as underwriter received $1,734 on
class A redemptions.
Note 3
Purchases and sales of securities
During the year ended February 28, 1999, purchases and sales of investment
securities other than short-term investments aggregated $1,554,003,623 and
$1,526,689,427, 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 February 28, 1999, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
February 28, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 6,334,545 $86,668,517
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,863,995 24,474,124
- -----------------------------------------------------------------------------
8,198,540 111,142,641
Shares
repurchased (6,508,215) (87,307,056)
- -----------------------------------------------------------------------------
Net increase 1,690,325 $23,835,585
- -----------------------------------------------------------------------------
Year ended
February 28, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 5,175,007 $66,125,111
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,524,545 29,941,026
- -----------------------------------------------------------------------------
7,699,552 96,066,137
Shares
repurchased (4,001,992) (51,079,869)
- -----------------------------------------------------------------------------
Net increase 3,697,560 $44,986,268
- -----------------------------------------------------------------------------
Year ended
February 28, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 7,834,152 $106,056,611
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,419,026 31,277,908
- -----------------------------------------------------------------------------
10,253,178 137,334,519
Shares
repurchased (7,619,210) (101,800,083)
- -----------------------------------------------------------------------------
Net increase 2,633,968 $ 35,534,436
- -----------------------------------------------------------------------------
Year ended
February 28, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 8,216,514 $105,808,985
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,942,200 34,659,096
- -----------------------------------------------------------------------------
11,158,714 140,468,081
Shares
repurchased (5,357,877) (69,585,473)
- -----------------------------------------------------------------------------
Net increase 5,800,837 $ 70,882,608
- -----------------------------------------------------------------------------
For the period
February 1, 1999
(commencement of
operations) to
February 28, 1999
- -----------------------------------------------------------------------------
Class C Shares Amount
- -----------------------------------------------------------------------------
Shares sold 13,918 $191,352
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- -----------------------------------------------------------------------------
13,918 191,352
Shares
repurchased -- --
- -----------------------------------------------------------------------------
Net increase 13,918 $191,352
- -----------------------------------------------------------------------------
Year ended
February 28, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 570,399 $7,693,217
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 185,652 2,412,397
- -----------------------------------------------------------------------------
756,051 10,105,614
Shares
repurchased (495,014) (6,700,818)
- -----------------------------------------------------------------------------
Net increase 261,037 $3,404,796
- -----------------------------------------------------------------------------
Year ended
February 28, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 645,008 $8,214,553
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 233,331 2,755,638
- -----------------------------------------------------------------------------
878,339 10,970,191
Shares
repurchased (213,412) (2,686,208)
- -----------------------------------------------------------------------------
Net increase 664,927 $8,283,983
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended the Fund
hereby designates $40,410,642 as a 20% capital gain, for its taxable year
ended February 28, 1999.
The fund has designated 10.69% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
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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
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
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
John J. Morgan, Jr.
Vice President
Justin M. Scott
Vice President and Fund Manager
Omid Kamshad
Vice President and Fund Manager
Paul C. Warren
Vice President and Fund Manager
Robert R. Beck
Vice President and Fund Manager
Michael K. Arends
Vice President and Fund Manager
Michael P. Stack
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
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.
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
www.putnaminv.com
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