PUTNAM BASIC VALUE FUND
SEMIANNUAL REPORT
February 28, 1995
(Putnam Logo)
Boston * London * Tokyo<PAGE>
FROM THE CHAIRMAN
Dear Shareholder:
We are pleased to report that Putnam Basic Value Fund
completed its first reporting period by registering a total
return of 4.00% at net asset value from the start of
operations on January 3, 1995, through February 28, 1995.
Fund Manager David King has diversified the portfolio among
44 stocks that are undervalued according to various measures
of stock value. He currently intends to keep the portfolio
equally weighted, with each holding representing
approximately 1.5% to 2.5% of the total portfolio value.
Such an approach offers the benefits of diversification by
avoiding a large concentration in any single position. In
addition, Dave currently expects portfolio turnover to be
relatively low, since many of his investments may require
two to three years to reach their potential.
> SEARCHING FOR VALUE IN THREE DISTINCT CATEGORIES
In selecting stocks, Dave looks for opportunities that fall
into one of three categories. He refers to these categories
as anchor stocks, ramp stocks, and rocket stocks.
Anchor stocks have high, potentially sustainable dividend
yields, and can produce satisfactory returns with very
little price appreciation. In general, anchor stocks are
defensive, income-oriented holdings with limited downside
price risk.
Houston Industries, an electric utility that recently
underwent a favorable restructuring, typifies this category.
Over the past several years, the stock s dividend yield has
ranged from 8% to 9%. Until recently, the company s current
earnings did not fully cover its dividend payout, which
caused investors to question whether the dividend was
sustainable. However, as a part of its
<PAGE>
restructuring, Houston Industries sold its cable television
assets for more than $1 billion. This asset sale has
strengthened the company s balance sheet and Dave believes
this should make the dividend more secure.
The second category ramp stocks are those of companies
that were formerly among America s highest-quality growth
companies, but have seen their growth rates and their
stock prices recede in recent years. Often, their price
declines are the result of short-term market
disappointments. Dave s objective is to purchase these
stocks at their current depressed price levels and hold them
with the anticipation that they can recover all or a portion
of their price declines. Specifically, he hopes to achieve a
50% total return over an average two-year holding period for
each ramp stock.
An example in this category is Anadarko Petroleum, a company
involved in natural gas exploration and distribution. The
unusually mild winter has caused the price of natural gas to
decline, resulting in investor disenchantment with the
stocks of gas producers. Anadarko, while generally
considered by investors to be one of the highest-quality
companies in the industry, nevertheless saw its stock price
drop from nearly $60 per share to approximately $39 per
share, the average price at which Dave purchased the stock.
When the dynamics of the natural gas market improve, the
stock s price is likely to respond to the upside.
The final group, the rocket stocks, are those that fit the
traditional value-stock profile: companies that are out of
favor and may be experiencing financial difficulties.
Frequently, such companies are not widely followed by Wall
Street analysts and their businesses are often poorly
understood by investors.<PAGE>
Dave refers to such stocks as rockets because they hold
dramatic total return potential for the investor who
understands the companies financial or market dynamics, and
thus, their true underlying values. However, an investor
needs to have the patience to hold the stocks until other
investors catch on and begin to buy, driving up the stocks
prices, although there can be no assurance that this will
occur. Dave s target for a rocket stock is to achieve a 100%
total return over a three-year average holding period.
IBP, Inc. (formerly Iowa Beef Processing) is a classic
example of a large company that is covered by very few
analysts and whose business and general financial condition
are poorly understood. IBP, with 1994 revenue of
approximately $12 billion, is the nation s largest publicly
traded wholesale processor of cattle. Because the supply of
cattle is high and the price of beef is relatively low,
conditions in the cattle market have been unfavorable for
dealers and beef retailers. For IBP, however, these dynamics
are positive because, as a processor, it benefits from the
large volume of livestock to be processed for resale.
Thus, in the case of IBP, Dave s understanding of the
differing financial and market dynamics for cattle
processors versus those for dealers or retailers led him to
what he believes is an attractive opportunity that most
other investors have overlooked.
> A VALUE-ORIENTED GROWTH STRATEGY FOR THE LONG-TERM
INVESTOR
While two months is an insufficient time period in which to
evaluate the merits of a long-term investment strategy, it
is heartening to note that Dave is off to a successful
start. His<PAGE>
balanced approach to portfolio composition should enable the
fund to provide downside protection through defensive,
income-oriented investments, and growth potential through
undervalued holdings acquired at bargain prices.
While there are risks inherant in any investment approach,
we are, nonetheless, pleased the fund has come out of the
starting gate on the plus side. We anticipate that, as Dave
follows his disciplined strategy, the fund will have the
potential to provide long-term investors with ample rewards.
We would also like to take this opportunity to thank you for
participating in the incubated funds program. By providing a
new fund with an incubation period, the program enables us
to establish a track record and to critically evaluate the
results of the fund s particular investment approach. This
would not be possible without your participation.
Respectfully yours,
(signature of George Putnam)
George Putnam
April 19, 1995
The views expressed throughout this report are exclusively
those of Putnam Management. They are not meant as investment
advice. Although the described holdings were viewed
favorably as of February 28, 1995, there is no guarantee the
fund will continue to hold these securities in the future.<PAGE>
PERFORMANCE SUMMARY
This section provides, at a glance, information about your
fund s performance. Total return shows how the value of the
fund s shares changed over time, assuming you held the
shares through the entire period and reinvested all
distributions back into the fund. For comparative purposes,
we show how the fund performed relative to appropriate
indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 2/28/95
STANDARD
FUND & POOR s(R)
NAV POP 500 INDEX CPI
LIFE OF FUND
(SINCE 1/3/95) 4.00% -2.00% 6.59% 0.80%
TOTAL RETURN FOR PERIODS ENDED 3/31/95
(MOST RECENT CALENDAR QUARTER)
Fund
NAV POP
LIFE OF FUND
(SINCE 1/3/95) 5.76% -0.33%
Fund performance data do not take into account any
adjustment for taxes payable on reinvested distributions.
POP assumes maximum 5.75% sales charge. Performance data
represent past results and an expense limitation currently
in effect. Without the expense limitation, the fund s total
return would have been lower. Investment returns and net
asset value will fluctuate so an investor s shares, when
sold, may be worth more or less than their original cost.
Total return figures represent cumulative, not annualized,
performance.
The short-term results of a relatively new fund are not
necessarily indicative of its long-term prospects.
<PAGE>
TERMS AND DEFINITIONS
NET ASSET VALUE (NAV) is the value of all your fund s
assets, minus any liabilities, divided by the number of
outstanding shares, not including any initial or contingent
deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund
share plus the maximum sales charge levied at the time of
purchase. POP performance figures shown here assume the
maximum 5.75% sales charge.
COMPARATIVE BENCHMARKS
STANDARD & POOR'S 500 INDEX is an unmanaged list of common
stocks that is frequently used as a general measure of stock
market performance. The index assumes reinvestment of all
distributions and does not take into account brokerage
commissions or other costs. The fund s portfolio contains
securities that do not match those in the index.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of
inflation; it does not represent an investment return.<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
February 28, 1995 (Unaudited)
Common Stocks (98.1%)*
Number of Shares Value
Automotive(2.4%)
1,000 General Motors Corp. $ 42,625
Basic Industrial Products(7.7%)
1,400 Ball Corp. 45,850
1,700 CBI Industries, Inc. 41,225
1,700 Harnischfeger Industries, Inc. 47,387
134,462
Business Equipment and Services(4.3%)
500 IBM Corp. 37,625
4,200 Unisys Corp. 37,275
74,900
Chemicals(2.3%)
1,400 Union Carbide Corp. 40,075
Conglomerates(2.4%)
2,000 Ogden Corp. 42,750
Consumer Non Durables(11.6%)
1,000 American Brands, Inc. 37,375
600 Avon Products, Inc. 33,750
2,300 Dibrell Bros., Inc. 43,125
800 Eastman Kodak Co. 40,800
800 Philip Morris Cos., Inc. 48,600
203,650
Consumer Services(1.8%)
600 Dun & Bradstreet Corp. 30,975
Electronics and Electrical Equipment(2.6%)
3,000 Westinghouse Electric Corp. 46,500
Environmental Control(2.4%)
1,600 WMX Technologies, Inc. 42,200
Food and Beverages(2.0%)
1,100 IBP, Inc. 35,062
Health Care(7.1%)
1,300 Baxter International, Inc. 40,462
600 Bristol-Myers Squibb Co. 37,200
700 Lilly (Eli) & Co. 46,900
124,562
Common Stocks (continued)
Number of Shares Value
Insurance and Finance(18.5%)
700 Aetna Life & Casualty Co. 37,625
600 Bankers Trust New York Corp. 37,875
2,400 Bear Stearns Companies, Inc. 45,000
1,000 Beneficial Corp. 37,125
1,000 Lincoln National Corp. 40,375
1,000 Student Loan Marketing Assn. 36,875
2,800 USF&G Corp. 39,900
300 Wells Fargo & Co. 48,188
322,963
Metals and Mining(4.7%)
1,400 Alumax, Inc. $ 40,075
26 Freeport-McMoRan
Copper & Gold Co., Inc. 546
2,300 Freeport-McMoRan, Inc. 41,400
82,021
Oil and Gas(4.8%)
1,000 Anadarko Petroleum Corp. 43,875
2,000 Occidental Petroleum Corp. 39,750
83,625
Real Estate(6.3%)
2,800 Debartolo Realty Corp. 39,200
1,100 Meditrust Corp. 35,200
1,000 Nationwide Health
Properties, Inc. 36,000
110,400
Retail(2.3%)
1,500 Kroger Co. 39,375
Transportation(4.5%)
1,100 Illinois Central Corp. 37,263
2,300 Southern Pacific Rail Corp. 41,113
78,376
Utilities(10.4%)
1,100 Houston Industries Inc. 42,075
1,500 Northeast Utilities 34,125
1,000 NYNEX Corp. 39,250
1,200 Public Service Co. of Colorado 36,750
900 Texas Utilities Co. 29,588
181,788
Total Common Stocks
(cost $1,660,215) $ 1,716,309<PAGE>
Short-Term Investments (7.5%)*
(cost $131,000)
Principal Amount Value
$131,000 Federal Home Loan Mortgage
Corp. 5.95s, March 1, 1995 $ 131,000
Total Investments
(cost $1,791,215)*** $ 1,847,309
Notes
* Percentages indicated are based on net assets of
$1,749,505, which correspond to a net asset value per share
of $8.84.
Non-income-producing security.
*** The aggregate identified cost on a tax basis
is $1,791,215, resulting in gross unrealized appreciation
and depreciation of $73,580
and $17,486, respectively, or net unrealized appreciation of
$56,094.
The accompanying notes are an integral part of these
financial statments.<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1995 (Unaudited)
ASSETS
Investments in securities, at value (identified cost
$1,791,215) (Note 1) $1,847,309
Cash 503
Dividends and interest receivable 6,662
Receivable for shares of the fund sold 95
Receivable from Manager (Note 3) 244
Unamortized organization expenses 6,245
TOTAL ASSETS 1,861,058
LIABILITIES
Payable for securities purchased 101,888
Payable for investor servicing
and custodian fees (Note 3) 796
Amortization of organization expenses (Note 1) 6,425
Other accrued expenses 2,444
TOTAL LIABILITIES 111,553
NET ASSETS $1,749,505
REPRESENTED BY
Paid-in capital (Notes 1, 2 and 5) $1,685,716
Undistributed net investment income (Note 1) 7,918
Accumulated net realized loss
on investment transactions (Note 1) (223)
Net unrealized appreciation of investments 56,094
TOTAL REPRESENTING NET ASSETS APPLICABLE TO
CAPITAL SHARES OUTSTANDING $1,749,505
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
Net asset value and redemption price per share
($1,749,505 divided by 197,843 shares) $8.84
Offering price per share (100/94.25 of $8.84)* $9.38
* 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.
The accompanying notes are an integral part of these
financial statements.<PAGE>
STATEMENT OF OPERATIONS
For the period January 3, 1995 (commencement of operations)
to February 28, 1995 (Unaudited)
INVESTMENT INCOME
Dividends $9,392
Interest 1,702
TOTAL INVESTMENT INCOME 11,094
EXPENSES:
Compensation of Manager (Note 3) 1,806
Investor servicing and custodian fees (Note 3) 1,413
Auditing 1,874
Legal 469
Amortization of organization expenses 180
Fees waived by Manager (Note 3) (2,667)
Other 101
TOTAL EXPENSES 3,176
NET INVESTMENT INCOME 7,918
Net realized loss on investments (Notes 1 and 4) (223)
Net unrealized appreciation
of investments during the period 56,094
NET GAIN ON INVESTMENT TRANSACTIONS 55,871
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $63,789
The accompanying notes are an integral part of these
financial statements.<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the period
January 3, 1995
(commencement
of operations)
to February 28
1995*
INCREASE IN NET ASSETS
Operations:
Net investment income $7,918
Net realized loss on investments (223)
Net unrealized appreciation of investments 56,094
Net INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 63,789
Increase from capital share
transactions (Note 5) 1,665,716
TOTAL INCREASE IN NET ASSETS 1,729,505
NET ASSETS:
Beginning of period $20,000
End of period (including undistributed
net investment income of $7,918) $1,749,505
* Unaudited.
The accompanying notes are an integral part of these
financial statements.<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
January 3, 1995
(commencement
of operations)
to February 28,
1995*
NET ASSET VALUE, BEGINNING OF PERIOD $8.50
INVESTMENT OPERATIONS
Net investment income .04(a)
Net realized and unrealized
gain on investments .30
TOTAL FROM INVESTMENT OPERATIONS .34(a)
LESS DISTRIBUTIONS
Net investment income
Net realized gain on investments
TOTAL DISTRIBUTIONS
NET ASSET VALUE, END OF PERIOD $8.84
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%)(b) 4.00(c)
NET ASSETS, END OF PERIOD (IN THOUSANDS) $1,750
Ratio of expenses to average net assets (%) .20(a)(c)
Ratio of net investment income
to average net assets (%) .49(a)(c)
Portfolio turnover (%) 30.87(c)
* Unaudited.
Per share net investment income for the period January
3, 1995 (commencement of operations) to February 28, 1995
has been determined on the basis of the weighted average
number of shares outstanding during the period.
(a) Reflects an expense limitation in effect during the
period (See Note 3). As a result of such limitation,
expenses for the fund reflect a reduction of $0.01 per
share.
(b) Total investment return assumes dividend reinvestment
and does not reflect the effects of
sales charges.
(c) Not annualized.<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the period January 3, 1995 (commencement of operations)
to February 28, 1995 (Unaudited)
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is a series of Putnam Investment Funds (the
Trust ) which is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end
management investment company. The objective of the fund is
to seek long term capital appreciation by investing
primarily in common stocks which are undervalued at the time
of purchase.
The following is a summary of significant accounting
policies followed by the fund in the preparation of its
financial statements. The policies are in conformity with
generally accepted accounting principles.
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 market value following procedures approved by the
Trustees.
B JOINT TRADING ACCOUNT Pursuant to an exemptive order
issued by the Securities and Exchange Commission, the fund
may transfer uninvested cash balances into a joint trading
account, along with the cash of other registered investment
companies managed by Putnam Investment Management, Inc.
( Putnam Management ), the fund s Manager, a wholly-owned
subsidiary of Putnam Investments, Inc., and certain other
accounts. These balances may be invested in one or more
repurchase agreements and/or short-term money market
instruments.
C REPURCHASE AGREEMENTS The fund, or any joint trading
account, through its custodian, receives delivery of the
underlying securities, the market value of which at the time
of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. The fund s
Manager 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 and dividend income is
recorded on the ex-dividend date.
E FEDERAL INCOME TAXES It is the policy of the fund to
distribute all of its income within the prescribed time and
otherwise comply with the provisions of the Internal Revenue
Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under
Section 4982 of the Internal Revenue Code of 1986.
Therefore, no provision has been made for federal taxes on
income, capital gains or unrealized appreciation on
securities held and excise tax on income and capital gains.
F DISTRIBUTIONS TO SHAREHOLDERS Distributions to
shareholders will be recorded by the fund on the ex-dividend
date. The fund will distribute any net investment income at
least quarterly and net realized gains at least annually.
The amount and character of income and gains to be
distributed will be determined in accordance with income tax
regulations which may differ from generally accepted
accounting principles. These differences include treatment
of post-October losses, payment in-kind and market discount.
Reclassifications will be made to the fund s capital
accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under
income tax regulations.
G EXPENSES OF THE TRUST Expenses directly charged or
attributable to the fund will be paid from the assets of the
fund. Generally, expenses of the Trust will be allocated
and charged to the assets of each fund on a basis that the
Trustees deem fair and equitable, which may be based on the
relative assets of each fund or the nature of the services
performed and relative applicability to each fund.
H 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 aggregated $6,425. These expenses are being amortized
on a straight line basis over a five-year period.
NOTE 2
INITIAL CAPITALIZATION
AND OFFERING PRICE
OF SHARES
The Trust was established as a Massachusetts business trust
under the laws of Massachusetts on October 31, 1994.
During the period October 31, 1994 to January 3, 1995, the
fund had no operations other than those related to
organizational matters, including the initial capital
contribution of $20,000 and the issuance of 2,353 shares to
Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments, Inc. on December 13, 1994.
At February 28, 1995, Putnam Investment Management, Inc.
owned 176,471 shares of the fund (89.20% of shares
outstanding), valued at $1,560,004.
NOTE 3
MANAGEMENT FEE,
ADMINISTRATIVE
SERVICES, AND
OTHER TRANSACTIONS
Compensation of Putnam Management for management and
investment advisory services is paid quarterly based on the
average net assets of the fund for the quarter. Such fee is
based on the following annual rates: 0.70% of the first $500
million of average net assets, 0.60% of the next $500
million, 0.55% of the next $500 million, 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.
Through December 31, 1995, the fund s Manager has agreed to
limit the fund s expenses to the extent that expenses
(exclusive of brokerage, interest, taxes, deferred
organizational and extraordinary expenses and distribution
fees) exceed an annual rate of 1.00% of the fund s average
net assets.
The fund also reimburses the Manager for the compensation
and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund.
The aggregate amount of all such reimbursements is
determined annually by the Trustees.
Trustees of the fund receive an annual Trustee s fee of $100
and an additional fee for each Trustees meeting attended.
Trustees who are not interested persons of the Manager and
who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
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.
Investor servicing and custodian fees reported in the
Statement of operations for the period January 3, 1995
(commencement of operations) to February 28, 1995 have been
reduced by credits allowed by PFTC.
The fund has adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940, although the
fund is not currently making any payments pursuant to this
plan. The purpose of the plan 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
Trustees have approved payment by the fund to Putnam Mutual
Funds Corp. at an annual rate of up to 0.35% of the fund s
average net assets.
During the period January 3, 1995 (commencement of
operations) to February 28, 1995, Putnam Mutual Funds Corp.,
acting as the underwriter, received no commissions from the
sale of shares of the fund.
NOTE 4
PURCHASES AND
SALES OF SECURITIES
During the period January 3, 1995 (commencement of
operations) to February 28, 1995, purchases and sales of
investment securities other than short-term investments
aggregated $1,801,429 and $140,812, respectively. In
determining the net gain or
loss on securities sold, the cost of securities has been
determined on the identified cost basis.
NOTE 5
CAPITAL SHARES
For the period January 3, 1995 (commencement of operations)
to February 28, 1995, there was an unlimited number of
shares of beneficial interest authorized. Transactions in
capital shares were as follows:
January 3, 1995
(commencement
of operations) to
February 28, 1995
Shares Amount
Shares sold 195,490 $1,665,716
Shares repurchased
Net increase 195,490 $1,665,716<PAGE>
FUND INFORMATION
INVESTMENT
MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust
Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Thomas V. Reilly
Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Brett C. Browchuk
Vice President
Gary N. Coburn
Vice President
John J. Morgan, Jr.
Vice President
Alan Bankart
Vice President
David A. King
Vice President
and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam
Basic Value Fund. It may also be used as sales literature
when preceded or accompanied by the current prospectus,
which gives details of sales charges, investment objectives,
and operating policies of the fund, and the most recent copy
of Putnam s Quarterly Performance Summary. For more
information or to request a prospectus, call toll free
1-800-225-1581.
