PUTNAM
BALANCED
FUND
ANNUAL REPORT
SEPTEMBER 30, 1995
[PUTNAM LOGO]
BOSTON * LONDON * TOKYO
PERFORMANCE HIGHLIGHTS
> The fund's performance at net asset value since start
of operations on January 3, 1995, through September 30,
1995, handily outpaced that of both the Lehman Brothers
Government/Corporate Bond Index and the Lipper Balanced
Fund Index.*
FISCAL 1995 RESULTS AT A GLANCE
TOTAL RETURN: NAV POP
(change in value during period
plus reinvested distributions)
Life of fund (since 1/3/95) 24.24%
17.07%
SHARE VALUE: NAV POP
1/3/95 $8.50
$9.02 9/30/95 10.56
11.20
The fund is currently expected to pay its first distribution
in December.
Data above represent past results and are not indicative of
future performance. For additional performance information,
see pages 8 and 9. Fund performance data do not take into
account any adjustment for taxes payable on reinvested
distributions. POP assumes 5.75% maximum sales charge.
Performance data represent an expense limitation currently in
effect. Without the expense limitation, the fund's total
return would have been lower. Investment returns and principal
value will fluctuate so an investor's shares when sold may be
worth more or less than their original cost. The short-term
results of a relatively new fund are not necessarily
indicative of its long-term prospects.
*Lehman Brothers Government/Corporate Bond Index, which had a
total return of 13.93% for the same period, is an unmanaged
list of U.S. government and corporate fixed-income securities.
Lipper Balanced Fund Index, which had a total return of 19.54%
for the period, is an unmanaged list of U.S. equity and fixed-
income securities.
FROM THE CHAIRMAN
DEAR SHAREHOLDER:
SUSTAINED STRENGTH IN BOTH THE STOCK AND BOND MARKETS
THROUGHOUT MUCH OF PUTNAM BALANCED FUND'S FIRST FISCAL YEAR
WAS A MAJOR CONTRIBUTOR TO THE FUND'S POSITIVE PERFORMANCE
FROM ITS START OF OPERATIONS ON JANUARY 3, 1995, THROUGH
SEPTEMBER 30, 1995.
IN GENERAL, THE FUND'S FIXED-INCOME INVESTMENTS ADVANCED IN
TANDEM WITH ITS EQUITY HOLDINGS THROUGHOUT THE PERIOD. THE
FEDERAL RESERVE BOARD'S DECISION TO STOP RAISING SHORT-TERM
INTEREST RATES WAS A PLUS FOR BOND INVESTORS DURING THE FISCAL
YEAR'S FINAL QUARTER. MODEST ECONOMIC GROWTH, COUPLED WITH
LOW INFLATION, HAS HELPED CREATE AN IDEAL ENVIRONMENT FOR
GROWTH AND INCOME INVESTING.
THIS FAVORABLE CLIMATE HAS HELPED THE FUND GET OFF TO A
HEALTHY START IN FISCAL 1995. IN THE REPORT THAT FOLLOWS,
YOUR FUND'S MANAGEMENT TEAM REVIEWS THE YEAR JUST ENDED
AND DISCUSSES PROSPECTS FOR THE YEAR AHEAD.
RESPECTFULLY YOURS,
/S/ GEORGE PUTNAM
GEORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
NOVEMBER 22, 1995
REPORT FROM THE FUND MANAGERS
DAVID SANTOS
KENNETH TAUBES
We are pleased to report that Putnam Balanced Fund completed
its first fiscal year with a total return of 24.24% at net
asset value from the start of operations on January 3, 1995,
through September 30, 1995. This total return is well ahead of
the Lehman Brothers Government/Corporate Bond Index and the
Lipper Balanced Fund Index, which had total returns of 13.93%
and 19.54%, respectively, for the same period.
In the nine months since the fund was launched, all the under
pinnings of the U.S. economy have been favorable to financial
instruments. Low interest rates, low inflation, and a
moderately paced economy combined with robust stock and bond
markets contributed to the fund's strong performance.
In addition, growth-oriented funds generally fared better than
value-oriented funds. Your fund's allocation of 60% core-
growth stocks and 40% fixed-income securities differentiated
it favorably from typical balanced funds, which tend to be
value oriented.
In selecting stocks for the portfolio, we employed a time-
tested approach of integrating fundamental analysis with a
proprietary quantitative process designed to identify the best
core-growth stocks across a variety of industries. We targeted
companies with at least $1 billion market capitalization, a
minimum 10% earnings growth rate potential, and ample
liquidity. Among these, we selected inexpensively priced
stocks of companies that had the potential to pay dividends
over time and to deliver above-average growth. While the fund
is intended to focus on individual stocks rather than industry
sectors, a substantial portion of stocks that met our criteria
were in the technology and financial services sectors.
> TECHNOLOGY, FINANCE DROVE EQUITY PERFORMANCE
Technology and computer services stocks within the business
equipment and electronics and electrical equipment sectors
were the key drivers of performance in the fund's first fiscal
year. These stocks saw their earnings estimates revised upward
significantly
and, thus, their prices raised dramatically. This was
especially the case for the stocks of semiconductor companies,
which as a group rose in price nearly 75% year-to-date through
September 30.
A key factor in this sector's success was the explosion in
sales of personal computers to individual consumers and
corporations, which drove up demand for microprocessors and
basic memory
chips. Witness the launch of Windows 95, software that
requires twice as much memory as the old Windows version.
Technology in general, whether it be software or hardware, was
exceptionally beneficial to the fund this year.
The portfolio's most heavily weighted area, insurance and
finance, was another major contributor to fund performance.
The underlying trend of lower interest rates in 1995 drove
financial stocks up significantly. Banks, in particular, were
the beneficiaries of lower rates and rapid industry
consolidation, while the brokerage and investment banking-
related companies did very well due to the surge in new issues
from July through September.
> A LOOK AT SOME OF YOUR FUND'S HOLDINGS
Technology and computer services _ Texas Instruments, LSI
Logic, and Microsoft have reaped the rewards of the current
global information revolution. The fund has also had a large
exposure to hardware: IBM, Hewlett-Packard, and Cisco Systems
have all benefited from growth trends in technology.
Insurance and finance _ Among a number of banks in the
portfolio, stocks of Citicorp and BankAmerica Corp. have been
excellent performers. Other financial services companies, such
as Travelers, did well as a result of intense trading.
TOP INDUSTRY SECTORS*
INSURANCE AND FINANCE 8.7%
BUSINESS EQUIPMENT AND SERVICES 6.1% ELECTRONICS
AND ELECTRICAL EQUIPMENT 5.2% RETAIL
4.7% CONSUMER NONDURABLES 4.2%
* Based on net assets as of 9/30/95. Portfolio holdings
will
vary over time.
Aerospace and defense _ Boeing and Lockheed Martin have
undergone dramatic restructuring in the face of the sharp
decline in defense spending. The belt-tightening leaves them
well equipped to benefit from an increase in commercial
aircraft orders and consolidation in the defense business.
Telecommunications _ Although the fund is lightly weighted in
utilities, we recently added two regional Bell companies to
the portfolio: Bell Atlantic and Ameritech. We also added
Southwest Bell shortly after fiscal year-end. Current
legislation in the House and Senate gives a distinct edge to
regional Bells over long-distance companies and we believe the
regionals should experience increasing profit margins.
> STRATEGIC SHIFT FROM LARGE-CAPS TO MID-CAPS
We are somewhat concerned that blue-chip stocks may be
becoming overvalued relative to their mid-cap counterparts.
While the former did well for the fund in fiscal 1995, we
think they may now become stretched. Since we believe the
market advance still has a way to go, as does the economic
recovery, we do not think any near-term volatility will spell
the end of the bull market, nor do we believe it will be a
precursor to a recession.
In laying the groundwork for our strategy in fiscal 1996, we
are gradually increasing the fund's exposure to medium-sized
companies. Because of the prospect that lower interest rates
will add another dash of impetus to economic growth, we're
adding growth companies that tend to do well in the latter
stages of a recovery.
> BOND PORTFOLIO ADDS TO FUND'S
STRONG PERFORMANCE
The fund's fixed-income holdings advanced in tandem with
its equity investments. We anticipated a slowing economy and
continued low inflation and recognized the attractive price
levels to which bonds had fallen. Our expectations were
fulfilled that the fund would benefit from the across-the-
board bond-market rebound that began in early 1995.
Perhaps the most significant change in the bond portfolio was
that, at the start of the fiscal year, we extended the
overall maturity of the portfolio to focus on bonds with
longer durations. We also increased U.S. corporate bond
holdings in TOP 10 HOLDINGS (9/30/95)
U.S. TREASURY BONDS 8.125% 8/15/19
U.S. TREASURY PRINCIPAL STRIPS 11/15/00
U.S. TREASURY NOTES 7.875% 11/15/04
U.S. TREASURY NOTES 7.75% 1/31/00
U.S. TREASURY NOTES 7.375% 5/15/96
GOVERNMENT NATIONAL MORTGAGE ASSOC.
7.00% 10/15/23 U.S. TREASURY NOTES 4.75%
8/31/98 SBC COMMUNICATIONS, INC.
MCI COMMUNICATIONS CORPORATION
PHILIP MORRIS COMPANIES, INC.
These holdings represent 26.74% of the fund's net assets.
Holdings will vary over time.
the second half of the fiscal year. During this period, both
investment-grade and high-yield bonds fared as well as, if not
better than, U.S. Treasuries. In selecting foreign bonds, we
looked for outperformance in comparison with the U.S. market
and found it in securities of England, France, and Germany.
Our dual strategy of extending maturities and emphasizing
corporate bonds has helped support the fund's net asset value
under current market conditions.
> OUTLOOK POSITIVE GOING INTO FISCAL `96
We believe that slow to moderate economic growth will continue
into fiscal `96. But we think it is unrealistic to assume the
market will remain as exuberant as it has been thus far in
1995. There will likely be some profit taking after the long
market runup. Corporate profit growth, which remains high
after four years of business recovery, may begin to slow.
However, with inflation in check, interest rates low, and
corporate America lean from restructurings, our fundamental
outlook on balance for the markets is positive. We will
continue to monitor economic and corporate developments with a
watchful eye toward risk. With its careful, disciplined
strategy, your fund has the potential to provide attractive
rewards for long-term investors.
The views expressed throughout the report are exclusively
those of Putnam Management and they are not meant as
investment advice. Although the described holdings were viewed
favorably as of 9/30/95, there is no guarantee the fund will
continue to hold these securities in the future.
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.
Performance should always be considered in light of a fund's
investment strategy. Putnam Balanced Fund is designed for
investors seeking capital growth and current income through a
portfolio of core-growth stocks and fixed-income securities.
TOTAL RETURN FOR PERIOD ENDED 9/30/95
STANDARD LEHMAN BROS.DOW
JON ES
& POOR'S
GOVT/CORPINDUSTRIAL NAV POP 500(R)INDEX
BOND INDEX
AVERAGE
LIFE OF FUND
(SINCE 1/3/95) 24.24% 17.07% 29.66% 13.93%
27.31%
Fund performance data do not take into account any adjustment
for taxes payable on reinvested distributions. Performance
data represent past results. 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 that
an investor's shares, when sold, may be worth more or less
than their original cost. The short-term results of a
relatively new fund are not necessarily indicative of its long-
term prospects.
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.
GROWTH OF A $10,000 INVESTMENT
CUMMULATIVE TOTAL RETURN OF A $10,000 INVESTMENT SINCE 1/3/95
[LINE GRAPH DEPICTING FUND SHARES AT POP BEGINNING AT $9,425
ON 1/3/95 AND ENDING AT $11,707 ON 9/30/95, LEHMAN BROS.
GOVT./CORP. BOND INDEX AND CONSUMER PRICE INDEX BEGINNING AT
$10,000 ON 1/3/95 AND ENDING AT $11,293 AND $10,234 ON
9/30/95, RESPECTIVELY.]
Past performance is no assurance of future results.
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.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX is an
unmanaged list of publicly issued U.S. Treasury obligations
and corporate debt securities.
LIPPER BALANCED FUND INDEX is an unmanaged list of U.S. equity
and fixed-income securities.
DOW JONES INDUSTRIAL AVERAGE is an unmanaged list of
30 common stocks frequently used as a general measure of stock
market performance.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of
inflation; it does not represent an investment return.
The above indexes assume reinvestment of all distributions and
do not take into account brokerage commissions or other costs.
Because the fund is a managed portfolio investing in common
stocks and fixed-income securities, the securities it owns
will not match those of the indexes. It is not possible to
invest directly in an index.
REPORT OF INDEPENDENT ACCOUNTANTS
For the period January 3, 1995 (commencement of operations) to
September 30, 1995
To the Trustees and Shareholders of
Putnam Balanced Fund
We have audited the accompanying statement of assets and
liabilities of Putnam Balanced Fund, including the portfolio
of investments owned, as of September 30, 1995, the related
statement of operations, the statement of changes in net
assets and the financial highlights for the period January 3,
1995 (commencement of operations) to September 30, 1995. These
financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is
to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of September 30, 1995 by correspondence
with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of Putnam Balanced Fund as of
September 30, 1995, the results of its operations, the changes
in its net assets, and the financial highlights for the period
January 3, 1995 (commencement of operations) to September 30,
1995, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 16, 1995
PORTFOLIO OF INVESTMENTS OWNED
September 30, 1995
COMMON STOCKS(60.1%)*
NUMBER OF SHARES VALUE
AEROSPACE AND DEFENSE(1.8%)
200 Boeing Co. $13,650
200 Lockheed Martin Corp.
13,425
100 McDonnell Douglas Corp.
8,275
------
-
35,3
50
AUTOMOTIVE(0.6%)
300 General Motors Corp.
Class H
12,300
BASIC INDUSTRIAL PRODUCTS(0.7%)
200 Parker-Hannifin Corp.
7,600
100 Sundstrand Corp.
6,475
----
-
14
,0
75
BROADCASTING(2.7%)
200 Capital Cities/ABC, Inc.
23,525
350 Tele-Communications Liberty
Media Group, Inc. Class A+
9,363
600 Tele-Communications Inc.
(TCI Group) Class A+
10,500
200 Viacom, Inc. Class B+
9,950
----
-
53
,3
38
BUILDING AND CONSTRUCTION(0.6%)
200 Fluor Corp.
11,200
BUSINESS EQUIPMENT AND SERVICES(6.1%)
200 3Com Corp.+
9,100
200 Cabletron Systems, Inc.+
13,175
100 Ceridian Corp.+
4,438
100 Cisco Systems, Inc.+
6,900
200 DSC Communications Corp+
200 First Data Corp. 12,400
200 General Motors Corp. Class E. 9,100
100 HBO & Co. 6,250
100 Harcourt General, Inc. 4,188
200 IBM Corp. 18,875
100 U.S. Robotics Corp.+ 8,525
100 Xerox Corp.13,438
-----
118,239
CHEMICALS(1.3%)
300 du Pont (E.I.) de Nemours &
Co., Ltd.
20,625
200 Praxair, Inc.
5,350
----
- --
25,9
75
COMMON STOCKS (CONTINUED)
NUMBER OF SHARES
VALUE
COMPUTER SERVICES AND SOFTWARE(2.2%)
300 Computer Associates
International, Inc. $
12,675
200 Microsoft Corp.+
18,100
200 Parametric Technology
Corp.+
12,300
----
-
43
,0
75
CONGLOMERATES(1.1%)
300 Allied-Signal, Inc.
13,238
100 TRW, Inc.
7,438
----
-
20
,6
76
CONSUMER DURABLE GOODS(0.7%)
400 Black & Decker
Manufacturing Co.
13,650
CONSUMER NON DURABLES(4.2%)
200 Eastman Kodak Co.
11,850
300 Philip Morris Cos., Inc.
25,050
200 Premark International, Inc.
10,175
200 Procter & Gamble Co.
15,400
400 Scott Paper Co.
19,400
----
-
81
,8
75
CONSUMER SERVICES(2.0%)
300 CUC International, Inc.+
10,463
400 Marriott International, Inc.
14,950
400 Mirage Resorts, Inc.+
13,150
----
-
38
,5
63
ELECTRONICS AND ELECTRICAL
EQUIPMENT(5.2%)
100 Applied Materials, Inc.+
10,225
200 Emerson Electric Co.
14,300
200 Hewlett-Packard Co.
16,675
300 Honeywell, Inc.
12,863
200 Intel Corp.
12,025
200 LSI Logic Corp.+
11,550
200 Motorola, Inc.
15,275
100 Texas Instruments, Inc.
7,988
----
-
100
,9
01
FOOD AND BEVERAGES(2.2%)
100 IBP, Inc.
5,338
400 PepsiCo, Inc.
20,400
100 Pioneer Hi-Bred
International, Inc.
4,600
400 Sara Lee Corp.
11,900
---
-
42
,2
38
COMMON STOCKS (CONTINUED)
NUMBER OF SHARES
VALUE
HEALTH CARE(3.6%)
200 Amgen, Inc.+ $
9,975
500 Baxter International, Inc.
20,563
200 Columbia/HCA
Healthcare Corp.
9,725
200 Guidant Corp.
5,850
200 Medtronic, Inc.
10,750
300 Upjohn Co.
13,388
70,251 INSURANCE AND FINANCE(8.7%)
300 American General Corp.
11,213
150 American International
Group, Inc.
12,750
400 BankAmerica Corp.
23,950
200 Barnett Banks, Inc.
11,325
100 CIGNA Corp.
10,413
300 Citicorp
21,225
200 Federal National
Mortgage
Association
20,700
200 Franklin Resources,
Inc.
11,525
200 Merrill Lynch & Co.,
Inc.
12,500
200 NationsBank Corp.
13,450
400 Travelers, Inc.
21,250
----
-
170
,3
01
METALS AND MINING(0.7%)
500 Freeport-McMoRan
Copper & Gold Co., Inc.
Class A
12,813
OIL AND GAS(2.4%)
100 British Petroleum PLC ADR
(United Kingdom)
8,988
300 Enron Corp.
10,050
100 Mobil Corp.
9,963
100 Schlumberger Ltd.
6,525
400 Total Corp. ADR(France)
12,050
---
-
47
,5
76
PHARMACEUTICALS(3.5%)
300 Johnson & Johnson
22,238
300 Pfizer, Inc.
16,013
400 Smithkline Beecham PLC ADR
(United Kingdom)
20,250
100 Warner-Lambert Co.
9,525
---
-
68
,0
26
COMMON STOCKS (CONTINUED)
NUMBER OF SHARES
VALUE
RETAIL(4.7%)
300 Circuit City, Stores Inc. $
9,488
500 Federated Department
Stores+
14,188
300 Kroger Co.+
10,238
100 Lowe's Cos., Inc. 3,000
500 Office Depot, Inc.+ 15,063
300 Rite Aid Corp. 8,400
500 Sears, Roebuck & Co. 18,427
200 Tandy Corp. 12,150
26,063
TELECOMMUNICATIONS (1.3%)
1,000 MCI Communications Corp. 26,063
TRANSPORTATION (0.7%)
200 Burlington Northern 14,500
Santa Fe Corp.
UTILITIES (3.1%)
300 Ameritech Corp. New 15,638
300 Bell Atlantic Corp. 18,413
500 SBC Communications, Inc. 27,500
61,551
TOTAL COMMON STOCKS
(cost $963,852)
$25,000 Federal National Mortgage
Association Dwarfs
6s, TBA, October 14, 2010+++ $24,250
34,921 Government National
Mortgage Association 7s,
October 15, 2023 34,528
24,684 Government National
Mortgage Association 6s,
January 15, 2008
24,013
107,000 U.S. Treasury Bonds 8 1/8s,
August 15, 2019
125,524
25,000 U.S. Treasury Interest
Strip, February 15, 2003
15,953
17,000 U.S. Treasury Interest
Strip, May 15, 2003
10,664
63,000 U.S. Treasury Notes 7 7/8s,
November 15, 2004
70,058
62,000 U.S. Treasury Notes 7
3/4s, January 31, 2000
66,011
13,000 U.S. Treasury Notes 7
3/4s, February 15, 2001
13,993
39,000 U.S. Treasury Notes 7
3/8s, May 15, 1996
39,384
11,000 U.S. Treasury Notes 7
1/4s, August 15, 2004
11,761
35,000 U.S. Treasury Notes 4
3/4s, August 31, 1998
33,923
100,000 U.S. Treasury Principal Strip, November
15, 2000
73,647
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (COST
$518,188)
$543,709
CORPORATE BONDS AND NOTES(4.3%)*
PRINCIPAL AMOUNT
VALUE
$ 10,000 Citizens Utilities Co. bonds
7.68s, 2034
$11,161 5,000
K Mart Corp. pass-thru
certificate Ser. 95-K3, 8.54s,
2015
5,063
3,463 Midland Cogeneration
Ventures deb. 10.33s, 2002
3,610
7,000 News America Holdings, Inc.
sr. notes 12s, 2001
7,827
CORPORATE BONDS AND NOTES (CON'T.)
PRINCIPAL AMOUNT
VALUE
10,000 Noranda Inc. notes 7s,
2005(Canada) $
9,939 7,000
Parker & Parsley Petro Co.
sr. notes 8 7/8s, 2005
7,615
10,000 Quebec (Province of)
deb. 8 5/8s, 2005
(Canada)
11,069 5,000
RHG Finance Corp. bonds
8 7/8s, 2005
4,995
5,000 Rodamco NV notes 7 3/4s,
2015(Netherlands)
5,188
7,000 Telekom Malaysia Berhad
144A deb. 7 7/8s, 2025
(Malaysia)
7,193
5,000 Texas New-Mexico Power
Utilities 1st mtge. 9 1/4s, 2000
5,265
5,000 Time Warner Inc. deb.
9 1/8s, 2013
5,427
TOTAL CORPORATE BONDS AND NOTES
(cost $81,773)
$84,352 FOREIGN GOVERNMENT BONDS AND
NOTES(3.2%)* PRINCIPAL AMOUNT
VALUE
FRF 20,000 France (Government
of) OAT deb. 8 1/2s,
2002
$ 4,338
FRF 70,000 France (Government
of) OAT deb. 8 1/2s,
2003
15,149 FRF 20,000 France
(Government
of) deb. 7s, 1999
4,095
DEM 25,000 Treuhandanstalt
(Germany Republic of)
7 1/8s, 2003
18,151 GBP 12,000 United Kingdom
Treasury bonds
9 3/4s, 2002
20,726 TOTAL FOREIGN GOVERNMENT BONDS AND NOTES
(cost $61,838)
$62,459
COLLATERALIZED MORTGAGE OBLIGATIONS(0.8%)*
PRINCIPAL AMOUNT
VALUE
$5,954 Chase Mortgage Finance
Corp. Ser. 93-3, Class B13,
7.461s, 2024
$ 3,916 7,742
Prudential Home Mortgage
Securities 144A Ser. 95-C,
Class B1, 7.84s, 2001
7,760 4,890 Prudential Home Mortgage
Securities Ser. 93-31, Class B2,
6s, 2000
3,717 TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(cost $15,284)
$15,393 SHORT-TERM INVESTMENTS(3.5%)*
(cost $68,025)
PRINCIPAL AMOUNT
VALUE
$68,000 Interest in
$652,192,000
joint repurchase agreement
dated September 29, 1995 with Goldman, Sachs &
Co. due October 2, 1995 with respect to
various U.S. Treasury obligations _ maturity
value of $68,036 for an effective yield of
6.375% $68,025
TOTAL INVESTMENTS
(cost $1,708,960)*** $1,947,428
Notes
* Percentages indicated are based on net assets of
$1,951,063,
which correspond to a net asset value per share of
$10.56. + Non-income-producing security.
+++ TBA's are mortgage backed securities traded under
delayed delivery commitments, settling after September 30,
1995. Although the unit price for the trades has been
established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate
more than 2% from the principal amount. Income on the
securities will not be earned until settlement date. The
cost of TBA purchases held at September 30, 1995 was
$24,250.
*** The aggregate identified cost for federal income tax
purposes is $1,708,965, resulting in gross unrealized
appreciation and depreciation of $248,608 and $10,145,
respectively, or net unrealized appreciation of $238,463.
ADR after the name of a holding stands for American
Depository Receipt representing ownership of foreign
securities on deposit with a domestic custodian bank.
144A after the name of a security represents those exempt
from registration under Rule 144A of the Securities Act of
1933.
These securities may be resold in transactions exempt
from registration, normally to qualified institutional
buyers.
FORWARD CURRENCY CONTRACTS TO SELL AT SEPTEMBER 30, 1995
Aggregate
Market Face Delivery Unrealized
Value Value Date
Depreciation British Pounds$40,828 $40,077
12/13/95 $ (751) Deutschemarks 8,413
8,160 12/13/95 (253)
French Francs 24,382 23,682 12/13/95
(700) $73,623 $71,919
$(1,704)
The accompanying notes are an integral part of these
financial statements.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
ASSETS
Investments in securities, at value
(identified cost $1,708,960) (Note 1)
$1,947,428 Receivable for shares of the fund sold
400
Dividends, interest and other receivables
11,699
Receivable for securities sold
39,295
Receivable from Manager (Note 3)
19,100
Unamortized organization expenses (Note 1)
6,150
TOTAL ASSETS
2,024,072
LIABILITIES
Payable to subcustodian (Note 3)
660
Payable for securities purchased
56,618
Payable for organization expenses (Note 1)
6,425
Payable for investor servicing and custodian fees (Note
3)3,502 Payable for administrative services (Note 3)
10 Payable for compensation of Trustees (Note 3)
74
Payable for open forward currency contracts (Note 1)
1,704 Other accrued expenses
4,016
TOTAL LIABILITIES
73,009
NET ASSETS
$1,951,063
REPRESENTED BY
Paid-in capital (Notes 1, 2 and 5)
$1,570,622 Undistributed net investment income (Note 1)
47,833
Accumulated net realized gain on investments
and foreign currency transactions (Note 1)
95,844
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies
236,764 TOTAL _ REPRESENTING NET ASSETS APPLICABLE TO
CAPITAL SHARES OUTSTANDING
$1,951,063
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
Net asset value and redemption price per share
($1,951,063 divided by 184,736 shares) $10.56
Offering price per share (100/94.25 of $10.56)* $11.20
* 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.
STATEMENT OF OPERATIONS
For the period January 3, 1995 (commencement of operations)
to September 30, 1995
INVESTMENT INCOME
Dividends (net of foreign tax of $94) $12,421
Interest 34,957
TOTAL INVESTMENT INCOME 47,378
EXPENSES:
Compensation of Manager (Note 3) 8,553
Investor servicing and custodian fees (Note 3) 16,701
Compensation of Trustees (Note 3) 543
Reports to shareholders 198
Auditing 16,306
Legal 9,808
Postage 260
Registration fees 558
Administrative services (Note 3) 30
Amortization of organization expense (Note 1) 275
Fees waived by Manager (Note 3) (43,750)
TOTAL EXPENSES 9,482
FEES PAID INDIRECTLY (NOTE 3) (5,093)
NET EXPENSES
4,389
NET INVESTMENT INCOME
42,989
Net realized gain on investments (Notes 1 and 4)
94,851
Net realized gain on forward currency contracts
and foreign currency translation (Note 1)
5,027
Net unrealized appreciation of investments during the
period
238,468
Net unrealized depreciation of forward currency contracts
and foreign currency translation during the period
(1,704) NET GAIN ON INVESTMENT TRANSACTIONS
336,642
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS$379,631
The accompanying notes are an integral part of these
financial statements.
STATEMENT OF CHANGES OF NET ASSETS
FOR THE PERIOD
JANUARY 3, 1995
(COMMENCEMENT
OF OPERATIONS)
TO SEPTEMBER 30,
1995
INCREASE IN NET ASSETS
Operations:
Net investment income $42,989
Net realized gain on investments and
foreign currency transactions 99,878
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 236,764
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 379,631
Increase from capital share transactions (Note 5) 1,551,432
TOTAL INCREASE IN NET ASSETS 1,931,063
NET ASSETS
Beginning of period (Note 2) 20,000
END OF PERIOD (including undistributed
net investment income of $47,833) $1,951,063
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
FOR THE PERIOD
JANUARY 3, 1995
(COMMENCEMENT
OF OPERATIONS)
TO SEPTEMBER 30,
1995
NET ASSET VALUE, BEGINNING OF PERIOD $8.50
INVESTMENT OPERATIONS:
Net investment income .23(a)
Net realized and unrealized gain on investments 1.83(a)
TOTAL FROM INVESTMENT OPERATIONS 2.06(a)
NET ASSET VALUE, END OF PERIOD $10.56
TOTAL INVESTMENT RETURN AT NET ASSET VALUE (%) (b) 24.24(c)
NET ASSETS, END OF PERIOD (in thousands) $1,951
Ratio of expenses to average net assets (%) (d) .54(a)(c)
Ratio of net investment income to average net assets
(%)2.44(a)(c) Portfolio turnover (%) 95.15(c)
(a) Reflects an expense limitation during the period (See
Note 3). As a result of such limitation, expenses
of the fund reflect a reduction of $0.23 per share.
(b) Total investment return assumes dividend reinvestment and
does not reflect the effect of sales charges.
(c) Not annualized.
(d) The ratio of expenses to average net assets includes
amounts paid through expense offset arrangements (See
Note 3). NOTES TO FINANCIAL STATEMENTS
For the period January 3, 1995 (commencement of operations) to
September 30, 1995
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is one in 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
capital growth and current income by investing primarily in
equity securities and fixed-income securities.
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-
thecounter _ the last reported bid price, except that certain
U.S. government obligations are stated at the mean between the
bid and asked prices. Market quotations are not considered to
be readily available for long term corporate bonds and notes;
such investments are stated at fair market value on the basis
of valuations furnished by a pricing service, approved by the
Trustees. 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. 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) 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
shortterm investments). 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 value at the time it was closed.
The maximum potential loss from forward currency contracts is
the aggregate face value in U.S. dollars at the time the
contract was opened. The fund could be exposed to risk if the
value of the currency changes unfavorably. In addition, the
fund could be exposed to risks 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.
F) FOREIGN CURRENCY TRANSLATION The accounting records of the
fund are maintained in U.S. dollars. The market value of
foreign securities, currency holdings, other assets and
liabilities are recorded in the books and records of the fund
after translation to U.S. dollars based on the exchange rates
on that day. The cost of each security is determined using
historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or
incurred. The fund does not isolate that portion of realized
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
fluctuations are included with the net realized and unrealized
gain or loss on investments. Net realized gains and losses on
foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of
foreign currencies and the difference between the amount of
investment income and foreign withholding taxes recorded on
the fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized gains and losses on
foreign currency transactions arise from changes in the value
of open forward currency contracts and assets and liabilities
other than investments at the period end, resulting from
changes in the exchange rate.
G) TBA PURCHASE COMMITMENTS The fund, may enter into "TBA"
(to be announced) purchase commitments to purchase securities
for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the
amount of the commitments will not fluctuate more than 2.0%
from the principal amount. The fund holds, and maintains
until settlement date, cash or high-grade debt obligations in
an amount sufficient to meet the purchase price, or the fund
may enter into offsetting contracts for the forward sale of
other securities they own. TBA purchase commitments may be
considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the
risk of decline in the value of the fund's other assets.
Unsettled TBA purchase commitments are valued at the current
market value of the underlying securities, generally according
to the procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase
commitments with the intention of acquiring securities for its
portfolio or for delivery pursuant to options contracts it has
entered into, the fund may dispose of a commitment prior to
settlement if Putnam Management deems it appropriate to do so.
H) FEDERAL 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.
I) DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders
will be recorded by the fund on the ex-dividend date. The
fund will distribute any 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 realized
and unrealized gains and losses on forward currency contracts.
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 period ended September 30, 1995, the fund
reclassified $4,844 to increase undistributed net investment
income, $4,034 to decrease accumulated net realized gain and
$810 to decrease paid-in-capital. The calculation of net
investment income per share in the financial highlights table
excludes these adjustments.
J) 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.
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
aggregated $6,425. These expenses are being amortized over a
five-year period based
on current and projected net asset levels. The fund will
reimburse Putnam Management for the payment of these expenses.
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.
At September 30, 1995, Putnam Investment Management, Inc.
owned 176,471 shares of the fund (95.5% of shares
outstanding), valued at $1,863,534.
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: 0.65% of the first
$500 million of average net assets, 0.55% of the next $500
million, 0.50% of the next $500 million, 0.45% of the next $5
billion, 0.425% of the next $5 billion, 0.405% of the next $5
billion, 0.39% of the next $5 billion, and 0.38% 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 0.70% 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.
During the period ended September 30, 1995, the fund adopted a
Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees
fees payable on or after July 1, 1995. The deferred fees
remain in the fund or in other Putnam funds until distribution
in accordance with the Plan.
Custodial functions for the fund's assets are provided by
Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are
provided by Putnam Investor Services, a division of PFTC.
For the period ended September 30, 1995, fund expenses were
reduced by $5,093 under expense offset arrangements with PFTC.
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 offset arrangements in an income-producing asset if
it had not entered into such arrangements.
As part of the custodial contract between Putnam Fiduciary
Trust Company and the subcustodian bank, the subcustodian has
a lien on the securities of the fund to the extent permitted
by the fund's investment restrictions to cover any advances
made by the subcustodian for the settlement of securities
purchased by the fund. At September 30, 1995, the payable to
subcustodian represents the amount due for cash advanced for
the settlement of a security purchase.
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 September 30, 1995, Putnam Mutual Funds Corp., acting as
the underwriter, received no net 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 September 30, 1995, purchases and sales of investment
securities other than U.S. government obligations and short-
term investments aggregated $1,950,764 and $901,371
respectively. Purchases and sales of U.S. government
obligations aggregated $1,185,737 and $690,716. 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
September 30, 1995, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares
were as follows:
FOR THE PERIOD JANUARY 3,
1995 (COMMENCEMENT OF
OPERATIONS) TO
SEPTEMBER 30,
1995
Shares
Amount
Shares sold 183,163
$1,559,513
Shares repurchased (780)
(8,081)
NET INCREASE 182,383
$1,551,432
FEDERAL TAX INFORMATION
(Unaudited)
The Form 1099 you will receive in January 1996 will show the
tax status of all distributions paid to your account in
calendar 1995. 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
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
David Santos
Vice President and Fund Manager
Kenneth J. Taubes
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 Balanced 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.
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.
