Putnam
Emerging
Growth
Fund
ANNUAL REPORT
August 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
Dear Shareholder:
It is with pleasure that your Trustees report on Putnam Emerging Growth
Fund's abbreviated fiscal period from December 28, 1995, through August
31, 1996. As you know, the fund is still in its incubated period;
however, it is scheduled to open to the public on November 1, 1996.
Certainly the early performance of your fund has been strong, with
shares rising 20.94% at net asset value (NAV) since inception. In the
months ahead, we are optimistic about prospects for companies in diverse
emerging markets, from Latin America to Eastern Europe to Southeast
Asia.
The fund is managed with an emphasis on company selection, with rapid
earnings growth as a distinguishing feature. Ideally the fund mostly
targets companies whose earnings are increasing by more than 20%
annually. Fund Manager J. Peter Grant also looks for companies with
undervalued assets. Russia, in particular, has many companies whose
assets -- including land, machinery, and oil reserves -- are valued at a
fraction of their real worth.
Evaluating the strength of a country's economy, while less important
than company selection, does have a role in the management of the fund.
If a country appears to be too unstable, either politically or
financially, Peter will avoid it. When investing in emerging markets,
however, it is not always possible to anticipate every problem, and thus
some risks remain.
Over the past six months, Peter and his management team identified a
number of attractive stocks, some of which are discussed below. While
they viewed these securities favorably at the end of the period, all
portfolio holdings are subject to review and adjustment in accordance
with the fund's investment strategy and may well vary in the future.
They saw strong performance from the fund's position in Pliva, a
Croatian pharmaceutical company. They also bought shares of another drug
company, the Hungarian firm Gedeon Richter, because it appeared
undervalued. In Russia, they found a number of companies that, while not
exhibiting substantial earnings growth, were also dramatically
undervalued. Lukoil is a massive semiprivatized oil company whose in-
ground oil reserves were assessed at 10 cents per barrel; many oil
companies in developed countries are comparably rated at around $6 per
barrel. Elsewhere in Europe, the fund owns Investec Consultadoria
International, a Portuguese media company moving its business from print
to television.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: TOP COUNTRY ALLOCATIONS
(8/31/96)*]
Brazil 15.2%
Philippines 8.7%
Hong Kong 8.5%
India 6.8%
Mexico 6.7%
Indonesia 5.6%
South Africa 5.4%
Footnote reads:
*Based on net assets. Country weightings will vary over time.
In Latin America, among other holdings, the fund owns shares of Telemig,
a telephone company, and Cie Cervejaria Brahma, a brewing company, both
Brazilian. The portfolio also includes stock in Apasco, a successful
Mexican cement maker. In Asia, the fund has positions in Siam Makro, a
Thai retailer; Belle Corp., a Philippine gaming concern; and Indian
Hotels, serving India's burgeoning business market. Another promising
company in Asia is Gudang Garam, a fast-growing Indonesian cigarette
manufacturer.
Putnam Management believes that emerging markets represent a profoundly
exciting long-term investment opportunity. Countries are enacting
policies more conducive to economic expansion and foreign investment.
Economic output is rising rapidly in many places, boosting per-capita
incomes and standards of living. In turn, companies -- some newly
private -- are thriving as they serve these dynamic markets. Putnam will
continue to invest in emerging markets as prudently as possible, seeking
to take advantage of these long-term trends.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
October 16, 1996
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 8/31/96, there is no guarantee the fund will
continue to hold these securities in the future. International investing
involves certain risks, including those related to economic instability,
unfavorable political developments, and currency fluctuations, not
present with domestic investments. These risks may be increased when
investing in emerging markets.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Emerging Growth Fund is designed for investors seeking
capital appreciation through investments in common stocks and other
equity securities of companies located in emerging markets outside the
United States.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIOD ENDED 8/31/96
Standard MSCI
& Poor's EAFE
NAV POP 500 Index Index
- -----------------------------------------------------------------------
Life of fund
since 12/28/95 20.94% 13.97% 7.64% 1.68%
- -----------------------------------------------------------------------
TOTAL RETURN FOR PERIOD ENDED 9/30/96
(most recent calendar quarter)
NAV POP
- -----------------------------------------------------------------------
Life of fund
since 12/28/95 20.94% 13.97%
- -----------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Performance data reflects an
expense limitation currently in effect. Without this expense limitation,
total returns would have been lower. Short-term results of a relatively
new fund, such as the fund, are not necessarily indicative of its long-
term prospects. 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. POP assumes 5.75% maximum sales charge.
[GRAPHIC WORM CHART OMITTED: GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 12/28/95
Starting value (Insert ending Total)
$9,425 Fund's shares at POP $11,397
$10,000 MSCI EAFE Index $10,168
(plot points for 10-year total return mountain chart)
Date/year Fund at POP MSCI EAFE INDEX
- --------- ----------- ---------------
12/29/95 9,425 10,000
1/31/96 10,089 10,041
2/29/96 10,156 10,075
3/31/96 10,400 10,289
4/30/96 11,100 10,588
5/31/96 11,811 10,393
6/30/96 12,011 10,452
7/31/96 11,100 10,146
8/31/96 11,397 10,168
Footnote reads:
Past performance is no assurance of future results.
PRICE AND DISTRIBUTION INFORMATION
12/28/95 through 8/31/96
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Distributions (number)* --
- -----------------------------------------------------------------------
Income --
- -----------------------------------------------------------------------
Capital gains --
- -----------------------------------------------------------------------
Total --
- -----------------------------------------------------------------------
Share value: NAV POP
- -----------------------------------------------------------------------
12/28/95 $8.50 $9.02
(inception)
- -----------------------------------------------------------------------
8/31/96 10.28 10.91
- -----------------------------------------------------------------------
* The fund made no distributions during the reporting period. It will
make its initial distribution before the end of calendar 1996.
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.
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
Morgan Stanley Capital International (MSCI) EAFE Index* is an unmanaged
list of equity securities from Europe, Australia, and the Far East, with
all values expressed in U.S. dollars.
* The index assumes reinvestment of all distributions and interest
payments and does not take in account brokerage fees or taxes.
Securities in the fund do not match those in the index and performance
of the fund will differ. It is not possible to invest directly in an
index.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Emerging Growth Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Putnam Emerging Growth Fund (the "fund") at August 31, 1996, and the
results of its operations, the changes in its net assets and the
financial highlights for the period December 28, 1995 (commencement of
operations) to August 31, 1996, 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 audit. We
conducted our audit 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 audit, which included confirmation of investments owned at August
31, 1996 by correspondence with the custodian, provides a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
October 16, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
August 31, 1996
<S> <C> <C> <C> <C>
COMMON STOCKS (77.6%) *
NUMBER OF SHARES VALUE
Argentina (1.7%)
- ----------------------------------------------------------------------------------------------------------------------------
12,000 Cresud S.A. $ 19,572
800 Inversiones Y Represent ADR 22,100
500 Siderar S.A. 144A ADR + 9,250
----------
50,922
Brazil (4.8%)
- ----------------------------------------------------------------------------------------------------------------------------
1,300 Cemig S.A. ADR 38,675
740 Telecomunicacoes Brasileiras S.A. (Telebras) 44,848
519 Telecomunicacoes do Rio de Janeiro S.A. (Brazil) 55,691
----------
139,214
Canada (0.8%)
- ----------------------------------------------------------------------------------------------------------------------------
2,700 Indochina Goldfields Ltd. 144A + 22,492
Chile (2.3%)
- ----------------------------------------------------------------------------------------------------------------------------
400 Cia de Telecomunicaciones de Chile S.A. ADR 39,100
2,300 Banco Satander Chile ADR 29,038
----------
68,138
Croatia (3.2%)
- ----------------------------------------------------------------------------------------------------------------------------
2,000 Pliva D.D. 144A GDR + 93,750
Guatemala (1.1%)
- ----------------------------------------------------------------------------------------------------------------------------
1,100 Basic Petroleum International, Ltd. + 31,075
Hong Kong (8.5%)
- ----------------------------------------------------------------------------------------------------------------------------
525 Asia Satellite Telecommunications Holdings Ltd. ADR + 13,781
7,000 Cheung Kong Infrastructure Holdings 11,452
7,000 Citic Pacific Ltd. 30,781
12,000 Consolidated Electric Power Asia Ltd. 22,116
22,212 First Pacific Co., Ltd. 36,053
45 HSBC Holdings PLC ADR 777
15,000 Hong Kong Telecommunications Ltd. 25,123
600 Hong Kong Telecommunications Ltd. ADR 10,125
18,000 New World Infrastructure Ltd. + 42,369
4,000 Swire Pacific Ltd. Class A 35,566
11,000 Varitronix International Ltd. 20,771
----------
248,914
Hungary (3.0%)
- ----------------------------------------------------------------------------------------------------------------------------
1,600 Gedeon Richter GDR 88,000
India (6.8%)
- ----------------------------------------------------------------------------------------------------------------------------
2,000 Ashok Leyland Ltd. GDR + 24,000
2,400 Crompton Greaves Ltd. 144A GDR 14,400
1,100 East India Hotels Ltd. GDR + 23,100
3,800 Gujarat Narmada Valley Fertilizers Co. Ltd. (GNFC) GDR 13,300
5,320 India Cements Ltd. GDR 23,248
1,000 Indian Hotels Co. Ltd. 144A GDR + 25,500
1,700 Indian Petrochemicals Corp. Ltd. GDR 20,825
2,500 Industrial Credit & Investment Corp. of India Ltd. ADR + 28,000
1,700 Tata Engineering & Locomotive Co. Ltd. GDR + 27,413
----------
199,786
Indonesia (5.6%)
- ----------------------------------------------------------------------------------------------------------------------------
38,000 PT Bank Dagang Nasional 26,778
16,244 PT Bank Internasional Indonesia 37,462
8,000 PT Gudang Garam 29,383
13,000 PT Matahari Putra Prima 17,073
12,580 PT Mulia Industrindo 12,760
700 PT Pasifik Satelit Nusantara ADR + 10,850
3,000 Sampoerna International Finance 28,892
----------
163,198
Luxembourg (1.4%)
- ----------------------------------------------------------------------------------------------------------------------------
1,000 Millicom International Cellular S.A. + 39,750
Malaysia (0.7%)
- ----------------------------------------------------------------------------------------------------------------------------
6,000 Maruichi Malaysia Steel Tube 21,661
Mexico (6.7%)
- ----------------------------------------------------------------------------------------------------------------------------
6,500 Apasco S.A. 43,762
8,700 Cemex S.A. de C.V. 32,589
29,000 Cifra S.A. de C.V. Ser. C + 45,328
10,000 Fomento Economico Mexicano, S.A. de C.V. Class B 29,901
44,000 Grupo Corvi S.A. units + 43,913
----------
195,493
Morocco (1.8%)
- ----------------------------------------------------------------------------------------------------------------------------
4,000 Banque Marocaine Du Commerce Exterieur 144A GDR + 52,000
Pakistan (2.9%)
- ----------------------------------------------------------------------------------------------------------------------------
1,300 Hubco Power GDR + 26,650
2,000 Pakistan State Oil 18,604
400 Pakistan Telecomm Ltd. 144A GDS + 39,800
----------
85,054
Panama (1.0%)
- ----------------------------------------------------------------------------------------------------------------------------
700 Panamerican Beverages, Inc. Class A 29,575
Peru (0.7%)
- ----------------------------------------------------------------------------------------------------------------------------
900 Telfonica del Peru S.A. ADR 21,038
Philippines (8.7%)
- ----------------------------------------------------------------------------------------------------------------------------
394,000 Alsons Consolidated Resources, Inc. + 34,339
155,000 Belle Corp. + 41,476
26,000 Fil-Estate Land, Inc. 26,835
96,000 Filinvest Development Corp. + 45,872
53,500 Filinvest Land, Inc. + 18,815
29,000 HI Cement Corp. + 10,088
56,000 International Container Terminal Services, Inc. + 34,251
2,500 Philippine National Bank + 41,810
----------
253,486
Portugal (2.6%)
- ----------------------------------------------------------------------------------------------------------------------------
2,600 Investec Consultadoria International + 77,024
Russia (3.2%)
- ----------------------------------------------------------------------------------------------------------------------------
1,300 AO Mosenergo 144A ADS 37,375
1,400 Lukoil Oil Co. ADR + 54,600
----------
91,975
Singapore (1.0%)
- ----------------------------------------------------------------------------------------------------------------------------
6,000 Far East Levingston Shipbuilding Ltd. 28,805
South Africa (5.4%)
- ----------------------------------------------------------------------------------------------------------------------------
2,300 Barlow Ltd. 21,170
2,900 Energy Africa Ltd. 144A + 38,425
1,200 Nedcor Ltd. GDR + 15,600
35,300 SA Iron & Steel Industrial Corp. 21,163
3,043 Sasol Ltd. 33,909
1,016 South African Breweries Ltd. 26,945
----------
157,212
South Korea (0.4%)
- ----------------------------------------------------------------------------------------------------------------------------
800 Korea Mobile Telecommunication ADR + 12,800
Thailand (3.3%)
- ----------------------------------------------------------------------------------------------------------------------------
9,000 Central Pattana Public Co. Ltd. 37,352
15,000 Siam City Bank Ltd. 29,645
6,000 Siam Makro Public Co. 30,593
----------
97,590
----------
Total Common Stocks (cost $1,967,718) $ 2,268,952
INVESTMENT FUNDS (2.6%) *
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
60,000 Ruam Pattana Fund II (Thailand) $ 34,980
1,000 Taiwan Fund, Inc. (Taiwan) 42,300
----------
Total Investment Funds (cost $73,187) $ 77,280
PREFERRED STOCKS (10.4%) *
NUMBER OF SHARES VALUE
Brazil (10.4%)
- ----------------------------------------------------------------------------------------------------------------------------
5,130 Banco Bradesco BRC 0.072 No Par Value (NPV) pfd. $ 43,406
100 Brasmotor S.A. pfd. 33,077
80,000 Centrais Electricas de Santa Catarina S.A. pfd. + 67,690
70 Cia Cervejaria Brahma pfd. 44,421
90 Cia Tecidos Norte de Minas BRC 8.65 NPV pfd. 30,551
320 Petroleo Brasileiro S.A. pfd. 38,722
400 Telemig (Telec De Minas Gerais) pfd. 45,336
----------
Total Preferred Stocks (cost $255,376) $ 303,203
WARRANTS (0.1%) * (cost $13,400) + EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ----------------------------------------------------------------------------------------------------------------------------
2,750 Southern Bank Berhad (Malaysia) 6/17/01 $ 2,776
SHORT-TERM INVESTMENTS (8.7%)* (cost $255,075)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
$255,000 Interest in $883,204,000 joint repurchase agreement dated August 30, 1996 with
Goldman, Sachs & Co. due September 3, 1996 with respect to various U.S. Treasury
obligations-maturity value of $255,149 for an effective yield of 5.26% $ 255,075
- ----------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,564,756) *** $ 2,907,286
- ----------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $2,924,774.
*** The aggregate identified cost on a tax basis is $2,566,700, resulting in gross unrealized appreciation and depreciation
of $453,556 and $112,970, respectively, or net unrealized appreciation of $340,586.
+ Non-income-producing security.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional
buyers.
ADR, ADS or GDR after the name of a foreign holding stands for American Depository Receipts, American Depository
Shares or Global Depository Receipts, respectively, representing ownership of foreign securities on deposit with a domestic
custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
August 31, 1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $2,564,756) (Note 1) $2,907,286
- -----------------------------------------------------------------------------------------------------------
Cash 200
- -----------------------------------------------------------------------------------------------------------
Dividends and other receivables 3,087
- -----------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,160
- -----------------------------------------------------------------------------------------------------------
Receivable for securities sold 27,107
- -----------------------------------------------------------------------------------------------------------
Receivable from Manager (Note 2) 8,392
- -----------------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 3,642
- -----------------------------------------------------------------------------------------------------------
Total assets 2,950,874
Liabilities
- -----------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 7
- -----------------------------------------------------------------------------------------------------------
Payable for organizational expenses (Note 1) 3,662
- -----------------------------------------------------------------------------------------------------------
Payable for auditing fees 16,300
- -----------------------------------------------------------------------------------------------------------
Payable for legal fees 2,800
- -----------------------------------------------------------------------------------------------------------
Payable for reports to shareholders 2,464
- -----------------------------------------------------------------------------------------------------------
Other accrued expenses 867
- -----------------------------------------------------------------------------------------------------------
Total liabilities 26,100
- -----------------------------------------------------------------------------------------------------------
Net assets $2,924,774
Represented by
- -----------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,474,342
- -----------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 4,897
- -----------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign currency transactions (Note 1) 103,013
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities in foreign currencies 342,522
- -----------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $2,924,774
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share ($2,924,774 divided by 284,487 shares) $10.28
- -----------------------------------------------------------------------------------------------------------
Offering price per share (100/94.25 of $10.28)* $10.91
- -----------------------------------------------------------------------------------------------------------
* 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.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
For the period December 28, 1995
(commencement of operations) to August 31, 1996
<S> <C>
Investment Income:
- ---------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $2,830) $28,363
- ---------------------------------------------------------------------------------------------
Interest 4,789
- ---------------------------------------------------------------------------------------------
Total investment income 33,152
Expenses:
- ---------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 21,095
- ---------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 3,585
- ---------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 327
- ---------------------------------------------------------------------------------------------
Administrative services (Note 2) 17
- ---------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 20
- ---------------------------------------------------------------------------------------------
Reports to shareholders 4,521
- ---------------------------------------------------------------------------------------------
Registration fees 872
- ---------------------------------------------------------------------------------------------
Auditing 16,300
- ---------------------------------------------------------------------------------------------
Legal 5,661
- ---------------------------------------------------------------------------------------------
Postage 44
- ---------------------------------------------------------------------------------------------
Other 465
- ---------------------------------------------------------------------------------------------
Fees waived and reimbursed by manager (Note 2) (20,364)
- ---------------------------------------------------------------------------------------------
Total expenses 32,543
- ---------------------------------------------------------------------------------------------
Expense reduction (Note 2) (2,344)
- ---------------------------------------------------------------------------------------------
Net expenses 30,199
- ---------------------------------------------------------------------------------------------
Net investment income 2,953
- ---------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 103,014
- ---------------------------------------------------------------------------------------------
Net realized loss on foreign currency translation (Note 1) (16)
- ---------------------------------------------------------------------------------------------
Net unrealized depreciation on foreign currency translation during the period (8)
- ---------------------------------------------------------------------------------------------
Net unrealized appreciation on investments during the period 342,530
- ---------------------------------------------------------------------------------------------
Net gain on investments 445,520
- ---------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $448,473
- ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
For the period
December 28, 1995
(commencement
of operations) to
August 31
- --------------------------------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------------------------------
<S> <C>
- --------------------------------------------------------------------------------------------------------
Increase in net assets
- --------------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------------
Net investment income $2,953
- --------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 102,998
- --------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities in foreign currencies 342,522
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 448,473
- --------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 476,301
- --------------------------------------------------------------------------------------------------------
Total increase in net assets 924,774
- --------------------------------------------------------------------------------------------------------
Net assets
- --------------------------------------------------------------------------------------------------------
Beginning of period (Note 5) 2,000,000
- --------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $4,897) $2,924,774
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period
December 28, 1995
(commencement
of operations)
to August 31
1996*
------------------
<S> <C>
Net asset value, beginning of period $8.50
- ---------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------
Net investment income .01(c)
- ---------------------------------------------------------------------------------
Net realized and unrealized gain on investments 1.77
- ---------------------------------------------------------------------------------
Total from investment operations 1.78
- ---------------------------------------------------------------------------------
Net asset value, end of period $10.28
- ---------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 20.94(d)
- ---------------------------------------------------------------------------------
Net assets, end of period (in thousands) $2,925
- ---------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.25(c)(d)
- ---------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) .11(c)(d)
- ---------------------------------------------------------------------------------
Portfolio turnover (%) 45.90(d)
- ---------------------------------------------------------------------------------
Average commission rate paid $.0060(d)
- ---------------------------------------------------------------------------------
* Per share net investment income has been determined on the basis of the weighted
averagage number of shares outstanding during the period.
(a) Total investment return does not reflect the effect of
sales charges.
(b) Includes amounts paid through expense
offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period
(Note 2). As a result of such limitation, expenses for
the fund reflect a reduction of $.09 per share.
(d) Not annualized.
</TABLE>
Notes to financial statements
August 31, 1996
Note 1
Significant accounting policies
The fund is one of 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
primarily investing in common stocks and other equity securities of
emerging market companies.
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 on its principal exchange, or, if no sales
are reported -- as in the case of some securities traded over-the-
counter -- the last reported bid price. Investments for which market
quotations are not readily available (and in certain circumstances debt
securities which trade on an exchange) are stated at fair value on the
basis of valuations furnished by pricing services approved by the
Trustees and dealers, which determine valuations for institutional size
trading units of such securities using methods based on market
transactions for comparable securities and various relationships between
securities that are generally recognized by institutional traders.
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 and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed).
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, 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.
F) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
G) Distributions to shareholders Distributions to shareholders from net
investment income if any, will be recorded by the fund on the ex-
dividend date. Capital gain distributions, if any, will be recorded on
the ex-dividend date and paid 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
organization expenses, realized gains and losses on short-term foreign
currency contracts and unrealized gains on passive foreign investment
companies. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution under income tax
regulations. For the year ended August 31, 1996, the fund reclassified
$1,944 to increase undistributed net investment income and $1,959 to
decrease paid-in-capital, with an increase to accumulated net realized
gains on investments of $15. The calculation of net investment income
per share in the financial highlights table excludes these adjustments.
G) Expenses of the Trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally, expenses
of the Trust will be allocated among 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 were $3,662. These expenses are being amortized
on projected net asset levels over a five-year period. The fund will
reimburse Putnam Management for the payment of these expenses.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 1.20% of the
first $500 million of average net assets, 1.10% of the next $500
million, 1.05% of the next $500 million, 1.00% of the next $5 billion
0.975% of the next $5 billion, 0.955% of the next $5 billion, 0.94% of
the next $5 billion, and 0.93% of any excess thereafter subject, under
current law, to reduction in any year by the amount of certain brokerage
commissions and fees (less expenses) received by affiliates of Putnam
Management on the fund's portfolio transactions.
Putnam Management has agreed to limit its compensation (and, to the
extent necessary, bear other expenses) through August 31, 1997, to the
extent that expenses of a fund (exclusive of brokerage, interest, taxes,
deferred organizational and extraordinary expense, credits from Putnam
Fiduciary Trust Company ("PFTC"), a wholly-owned subsidiary of Putnam
Investments, Inc. and payments under the Trust's distribution plan)
would exceed an annual rate of 1.85% of the fund's average net assets.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC, a
wholly-owned subsidiary of Putnam Investments, Inc. Investor servicing
agent functions are provided by Putnam Investor Services, a division of
PFTC.
For the period ended August 31, 1996, fund expenses were reduced by
$2,344 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 expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $100 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 adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in the fund or in other Putnam funds until distribution
in accordance with the Plan.
The fund has adopted a distribution plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. 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 Plan provides for 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. The fund is not currently making any
payments pursuant to the Plan.
During the period December 28, 1995 (commencement of operations) to
August 31, 1996, Putnam Mutual Funds Corp., acting as underwriter
received no commissions from the sale of shares of the fund.
Note 3
Purchases and sales of securities
During the period December 28, 1995 (commencement of operations) to
August 31, 1996, purchases and sales of investment securities other than
short-term investments aggregated $3,316,737 and $1,105,312,
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 August 31, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
For the period
December 28, 1995
(commencement of
operations) to
August 31, 1996
- ----------------------------------------------------
Shares Amount
- ----------------------------------------------------
Shares sold 52,471 $509,968
Shares
repurchased (3,277) (33,397)
- ----------------------------------------------------
Net increase 49,194 $476,301
- ----------------------------------------------------
Note 5
Initial capitalization and offering of shares
The Fund was established as a Massachusetts business trust on October
31, 1994. During the period October 31, 1994 to December 28, 1995, the
fund had no operations other than those related to organizational
matters, including the initial capital contribution of $2,000,000, and
$3,662 of initial organizational expenses, and the issuance of 235,293
shares to Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam
Investments, Inc. on December 28, 1995.
At August 31, 1996, Putnam Management owned 235,293 shares of the fund
(82.70% of shares outstanding), valued at $2,418,812.
Federal tax information
(Unaudited)
For the period, interest and dividends from foreign countries were
$31,193 or $.110 per share. Taxes paid to foreign countries were $2,830
or $.010 per share.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
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
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Tim Ferguson
Vice President
Brett C. Browchuk
Vice President
Anthony W. Regan
Vice President
J. Peter Grant
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Emerging
Growth Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For
more information, or to request a prospectus, call toll free: 1-800-225-
1581.
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
principal amount invested.
27673-2AY 10/96
