Putnam
Real Estate
Opportunities
Fund
ANNUAL REPORT
August 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
Dear Shareholder:
During the 12 months ended August 31, 1996, Putnam Real Estate
Opportunities Fund added a second fiscal year of solid performance to
its emerging track record. The period was marked by volatility in both
stock and bond markets as investors grappled with the economy's somewhat
confusing signals and their interest-rate implications.
While the broad stock market first soared to new heights and then gave
back many gains toward the end of the period, stocks of real estate
investment trusts (REITs) maintained a more even keel of steady income
and growth. Your fund followed suit, delivering a total return of 19.53%
at net asset value for the fiscal year, outpacing the National
Association of Real Estate Investment Trusts (NAREIT) Index, which
returned 18.49% for that period.
The fund's return also compares favorably with the return of the broad
stock market as measured by the Standard & Poor's 500(registered
trademark) Index, which returned 18.70% over the same period. Investors
should keep in mind, however, that REITs typically maintain a low
correlation with the activity of the broad market and that this
independence can help stabilize your overall portfolio; indeed, this is
the main reason many investors buy REITs.
* SECTOR STRATEGY REMAINS INTACT
The portfolio remains predominantly invested in REITs, with the
remaining assets primarily invested in the stocks of companies closely
related to the real estate industry.
Fund Manager Jeanne Mockard has kept the fund overweighted in
manufactured-home REITs, slightly overweighted in health-care REITs,
underweighted in retail REITs, and slightly underweighted in apartment
REITs. Stocks of home-builder REITs remain a significant part of the
portfolio. However, Jeanne did reduce exposure to these stocks by about
one half in January as valuations on certain stocks approached target
levels. With the manufactured-home REIT sector generating strong returns
for the first eight months of 1996, the portfolio's overweighting in
this area proved profitable for the fund. Stocks of hotel REITs were
also strong performers.
Unfortunately, a slight overweighting in health-care REITs did not serve
the fund as well, although fund management still views this sector
positively over the long term. Health-care REIT performance is not tied
to the general economy, depending instead on favorable demographic
trends involving our aging population and its growing need for health-
care services. Consequently, when the REIT group is doing well, as it
did during the fund's annual period, health-care REIT performance
doesn't stand out as much.
* RETAIL-RELATED DIVERSIFICATION PAYS OFF
Although retailers had been laboring under difficult economic conditions
for some time, your fund's management team anticipated that the effect
of the rising economy on retail sales would put retailers in a position
to request lower rents from retail REITs. For this reason, management
underweighted retail REITs while simultaneously investing a portion of
portfolio assets into retail stocks.
In contrast to retail REITs, which did not perform as well as expected,
the fund's retail stock holdings did exceptionally well. In fact, the
fund's retail stock gains more than compensated for the underweighting
in retail REITs. The fund's best holdings in this category included
Dayton-Hudson, Kmart, Melville, and JCPenney. While these stocks, along
with others discussed in this report, were viewed 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.
* CONSOLIDATION SWEEPS REIT INDUSTRY
As in the retailing industry, it has become obvious that smaller,
localized REITs will have difficulty realizing the cost structures and
economies of scale to compete successfully with larger companies.
Consequently, larger REITs are becoming stronger through expansion and
acquisition. This geographic expansion can also help protect the large
REITs' stock values, since positive conditions in one market may be able
to offset a downturn somewhere else.
By owning both small and large REITs, the fund is well positioned to
benefit from the consolidation trend. The smaller holdings are localized
REITs, which are viewed as experts in their markets. This makes them
attractive acquisition targets for larger REITs seeking to gain instant
prominence in a particular market. Of course, it typically pays to own
the strongest players in the industry; thus large REITs in the
apartment, industrial, and office sectors make up the fund's largest
portfolio positions.
[GRAPHIC OMITTED: TOP INDUSTRY SECTORS*]
Residential 19.0%
Office and
industrial 16.5%
Shopping centers 15.5%
Health-care
facilities 7.2%
Self storage 5.8%
Footnote reads:
*Based on net assets as of 8/31/96. Allocations will vary over time.
[GRAPHIC OMITTED: Top 10 Holdings]
Beacon Properties Corp.
Office and industrial
Simon DeBartolo Group, Inc.
Shopping centers
Cali Realty Corp.
Office and industrial
Public Storage, Inc.
Self-storage
Duke Realty Investments, Inc.
Office and industrial
Equity Residential Properties Trust
Residential
First Industrial Realty Trust, Inc.
Office and industrial
Rouse Co.
Real estate
Nationwide Health Properties, Inc.
Health-care facilities
Lowe's Cos., Inc.
Consumer products
Footnote reads:
These holdings represent 25.5% of the fund's net assets as of 8/31/96.
Portfolio holdings will vary over time.
* GROWING INVESTOR INTEREST MAKES OUTLOOK BULLISH
With so much consolidation taking place throughout the market, REITs are
generating a great deal of new investor interest. The dynamics of the
consolidation process are such that larger, growing REITs must
continuously come to the market seeking capital for expansion. This
heightens their visibility at the same time that their growth in size
approaches a level where institutional investors might soon be attracted
- -- which, in turn, could provide stronger underpinnings for the entire
REIT industry. Of course, there can be no guarantees, but REIT stocks
have already proved their ability to weather periods of volatility well,
and your management team believes the market is firmly positioned for
continued growth in the future.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
October 16, 1996
Footnote reads:
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. Funds investing in a
single sector may be subject to more volatility than funds investing in
a diverse group of sectors.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Real Estate Opportunities Fund is designed for
investors seeking capital growth and current income by investing
primarily in equity securities issued by companies principally engaged
in the real estate industries.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 8/31/96
S&P 500 NAREIT
NAV POP Index Index
- -----------------------------------------------------------------------
1 year 19.53% 12.64% 18.70% 18.49%
- -----------------------------------------------------------------------
Life of fund
(since 1/3/95) 33.45 25.76 47.09 28.92
Annual average 18.99 14.80 26.17 16.46
- -----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/96
(most recent calendar quarter)
NAV POP
- -----------------------------------------------------------------------
1 year 20.98% 14.05%
- -----------------------------------------------------------------------
Life of fund
(since 1/3/95) 38.20 30.24
Annual average 20.44 16.40
- -----------------------------------------------------------------------
Footnote reads:
Fund performance data do not take into account any adjustment for taxes
payable on reinvested distributions. Performance data represent past
results. Investment returns and net asset value will fluctuate so an
investor's shares, when sold, may be worth more or less than their
original cost. POP data assumes 5.75% maximum sales charge. An expense
limitation was in effect during the period; without the limitation,
total return would be lower.
[GRAPHIC WORM CHART OMITTED: GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 1/3/95
Starting value (Insert ending Total)
$9,425 Fund's class A shares at POP $12,576
$10,000 NAREIT Index $12,892
$10,000 Consumer Price Index $10,508
(plot points)
Date/year Fund at POP NAREIT Index CPI
- --------- ----------- ------------ -----
1/3/95 9,423 10,000 10,000
2/28/95 9,390 10,024 10,080
3/31/95 9,457 9,983 10,114
4/30/95 9,368 9,980 10,147
5/31/95 9,889 10,405 10,167
6/30/95 10,078 10,570 10,187
7/31/95 10,322 10,752 10,187
8/31/95 10,521 10,881 10,214
9/30/95 10,765 11,067 10,234
10/31/95 10,599 10,830 10,267
11/30/95 10,710 10,929 10,261
12/31/95 11,397 11,525 10,254
1/31/96 11,597 11,716 10,314
2/29/96 11,715 11,853 10,347
3/31/96 11,927 11,787 10,401
4/30/96 11,821 11,848 10,441
5/31/96 12,081 12,153 10,461
6/30/96 12,269 12,311 10,468
7/31/96 12,069 12,404 10,488
8/31/96 12,576 12,892 10,508
Footnote reads:
Past performance is no assurance of future results.
PRICE AND DISTRIBUTION INFORMATION
Period ended 8/31/96
- -----------------------------------------------------------------------
Distributions (number) 1
- -----------------------------------------------------------------------
Income $0.520
- -----------------------------------------------------------------------
Capital gains
- -----------------------------------------------------------------------
Long-term --
- -----------------------------------------------------------------------
Short-term 0.070
- -----------------------------------------------------------------------
Total $0.590
- -----------------------------------------------------------------------
Share value: NAV POP
- -----------------------------------------------------------------------
8/31/95 $9.49 $10.07
- ----------------------------------------------------------------------
8/31/96 10.67 11.32
- ----------------------------------------------------------------------
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial 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.
COMPETITIVE BENCHMARKS
Standard & Poor's 500 Index* is an unmanaged list of common stocks that
is frequently used as a general measure of stock market performance.
The National Association of Real Estate Investment Trusts (NAREIT)
Index* is based upon the last closing price of the month for all tax-
qualified REITs listed on the major U.S. stock exchanges. The data are
market weighted and the total return calculation is based upon the
weightings at the beginning of period. Dividends are included in the
month based upon their payment date.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*The indexes assume reinvestment of all distributions and do not take
into account brokerage commissions or other costs. The fund's portfolio
contains securities that do not match those in the indexes and
performance of the fund will differ. It is not possible to invest
directly in an index.
Report of independent accountants
For the fiscal year ended August 31, 1996
To the Trustees and Shareholders of
Putnam Real Estate Opportunities Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Real Estate Opportunities Fund, including the portfolio of
investments owned, as of August 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net
assets and the financial highlights for each of the periods indicated
therein. 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 audits.
We conducted our audits 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 August 31, 1996, by
correspondence with the custodian. 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 audits provide 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 Real Estate Opportunities Fund as of August
31, 1996, the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for each of the
periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
October 15, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
August 31, 1996
<S> <C> <C> <C>
COMMON STOCK (90.4%) *
NUMBER OF SHARES VALUE
Appliances (0.4%)
- ----------------------------------------------------------------------------------------------------------------------
200 Whirlpool Corp. $ 9,800
Basic Industrial Products (1.6%)
- ----------------------------------------------------------------------------------------------------------------------
900 Deere & Co. 35,775
Consumer Non Durables (0.7%)
- ----------------------------------------------------------------------------------------------------------------------
200 Eastman Kodak Co. 14,500
Consumer Products (1.6%)
- ----------------------------------------------------------------------------------------------------------------------
1,000 Lowe's Cos., Inc. 36,125
Diversifed (2.1%)
- ----------------------------------------------------------------------------------------------------------------------
1,000 Colonial Properties Trust (R) 25,125
1,400 Washington Real Estate Investment Trust (R) 22,225
----------
47,350
Forest Products (0.8%)
- ----------------------------------------------------------------------------------------------------------------------
400 Weyerhaeuser Co. 17,850
Health Care Facilities (7.2%)
- ----------------------------------------------------------------------------------------------------------------------
800 American Health Properties, Inc. (R) 17,500
80 American Health Properties, Inc. - Dep. Shs. (R) 1,100
1,100 LTC Properties Inc. (R) 17,875
600 Meditrust Corp. (R) 20,550
900 National Health Investors, Inc. (R) 30,150
1,800 Nationwide Health Properties, Inc. (R) 40,050
1,100 Omega Healthcare Investors, Inc. (R) 31,488
----------
158,713
Home Building (2.5%)
- ----------------------------------------------------------------------------------------------------------------------
800 Lennar Corp. 17,900
1,200 Oakwood Homes Corp. 28,200
500 Webb (Delaware East) Corp. 9,000
----------
55,100
Hotels (5.5%)
- ----------------------------------------------------------------------------------------------------------------------
800 FelCor Suite Hotels, Inc. (R) 24,400
1,100 Innkeepers USA Trust (R) 11,825
1,000 Patriot American Hospitality, Inc. (R) 30,500
1,000 RFS Hotel Investors, Inc. (R) 16,000
800 Starwood Lodging Trust (R) 30,400
700 Winston Hotels, Inc. (R) 8,662
----------
121,787
Manufactured Homes (3.1%)
- ----------------------------------------------------------------------------------------------------------------------
1,500 Manufactured Home Communities, Inc. (R) 27,938
900 ROC Communities, Inc. (R) 21,600
700 Sun Communities, Inc. (R) 19,863
----------
69,401
Mortgage (0.5%)
- ----------------------------------------------------------------------------------------------------------------------
500 Allied Capital Commercial Corp. (R) 11,250
Office and Industrial (16.5%)
- ----------------------------------------------------------------------------------------------------------------------
3,318 Beacon Properties Corp. (R) 90,420
600 Bedford Properties Investors, Inc. (R) 8,475
2,500 Cali Realty Corp. (R) 62,813
1,800 Duke Realty Investments, Inc. (R) 57,150
2,200 First Industrial Realty Trust, Inc. (R) 54,175
400 Highwoods Properties, Inc. (R) 11,900
400 Meridian Industrial Trust (R) 7,050
700 Reckson Associates Realty Corp. (R) 24,763
400 Spieker Properties, Inc. (R) 11,950
500 Trinet Corporate Realty Trust, Inc. (R) 15,750
700 Weeks Corp. (R) 20,038
----------
364,484
Railroads (0.7%)
- ----------------------------------------------------------------------------------------------------------------------
200 Union Pacific Corp. 14,575
Real Estate (2.1%)
- ----------------------------------------------------------------------------------------------------------------------
200 Castle & Cooke, Inc. + 3,050
1,700 Rouse Co. 43,988
----------
47,038
Residential (19.0%)
- ----------------------------------------------------------------------------------------------------------------------
1,800 Ambassador Apartments, Inc. (R) 31,725
1,400 Avalon Properties, Inc. 32,025
700 Bay Apartment Community, Inc. (R) 19,600
1,600 Columbus Realty Trust (R) 31,000
1,600 Equity Residential Properties Trust (R) 56,600
300 Essex Property Trust, Inc. (R) 7,163
1,400 Evans Withycombe Residential, Inc. 29,400
400 Gables Residential Trust (R) 9,600
1,500 Home Properties of NY, Inc. (R) 30,000
1,100 Mid-America Apartment Communities, Inc. (R) 26,538
1,000 Post Properties, Inc. (R) 35,875
1,600 Security Capital Pacific Trust (R) 33,400
1,200 Smith (Charles East) Residential Realty, Inc. (R) 28,650
2,400 South West Property Trust, Inc. (R) 31,500
800 Wellsford Residential Property Trust (R) 17,300
----------
420,376
Restaurants (0.8%)
- ----------------------------------------------------------------------------------------------------------------------
1,200 Commercial Net Lease Realty (R) 16,650
Retail (4.0%)
- ----------------------------------------------------------------------------------------------------------------------
600 Dayton Hudson Corp. 20,700
3,000 K mart Corp. 30,000
500 Melville Corp. 21,125
300 Penney (J.C.) Co., Inc. 15,863
----------
87,688
Self Storage (5.8%)
- ----------------------------------------------------------------------------------------------------------------------
2,700 Public Storage, Inc. (R) 58,050
900 Shurgard Storage Centers, Inc. Class A (R) 22,388
800 Storage Trust Realty (R) 17,500
900 Storage USA, Inc. (R) 29,250
----------
127,188
Shopping Centers (15.5%)
- ----------------------------------------------------------------------------------------------------------------------
1,400 Alexander Haagen Properties, Inc. (R) 19,250
1,400 Bradley Real Estate Trust, Inc. (R) 22,575
1,000 CBL & Associates Properties, Inc. (R) 23,000
1,100 Chelsea GCA Realty, Inc. (R) 32,038
900 Excel Realty Trust, Inc. (R) 19,688
1,152 Horizon Group, Inc. (R) 24,192
1,200 Kimco Realty Corp. (R) 34,800
1,600 Macerich Co. (The) (R) 34,400
1,700 Malan Realty Investments, Inc. (R) 23,800
2,600 Simon DeBartolo Group, Inc. (R) 64,675
2,000 Taubman Centers, Inc. (R) 21,750
600 Weingarten Realty Investors, Inc. (R) 23,700
----------
343,868
----------
Total Common Stock (cost $1,744,117) $ 1,999,518
CONVERTIBLE PREFERRED STOCKS (2.3%)*
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
400 Catellus Development Corp. $3.625, cv. pfd. $ 20,800
600 K mart Financing I $3.875, cv. pfd. 30,225
----------
Total Convertible Preferred Stocks (cost $51,500) $ 51,025
CONVERTIBLE BONDS AND NOTES (2.4%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
$30,000 Camden Property Trust cv. sub. deb. 7.33s, 2001 $ 31,950
20,000 Liberty Property Trust cv. sub. deb. 8s, 2001 21,200
----------
Total Convertible Bonds and Notes (cost $46,300) $ 53,150
SHORT-TERM INVESTMENTS (5.5%)* (cost $121,035)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
$121,000 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 $ 121,071 for an effective yield of 5.26%. $ 121,035
- ----------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,962,952)*** $ 2,224,728
- ----------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $2,212,553.
*** The aggregate identified cost on a tax basis is $1,951,952, resulting in gross unrealized appreciation and depreciation
of $293,450 and $20,674, respectively, or net unrealized appreciation of $272,776.
+ Non-income producing security.
(R) Real Estate Investment Trust.
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 $1,962,952) (Note 1) $2,224,728
- ----------------------------------------------------------------------------------------------------
Cash 761
- ----------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 4,185
- ----------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 25
- ----------------------------------------------------------------------------------------------------
Receivable from Manager (Note 2) 5,442
- ----------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 5,740
- ----------------------------------------------------------------------------------------------------
Total assets 2,240,881
Liabilities
- ----------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 62
- ----------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 7
- ----------------------------------------------------------------------------------------------------
Payable for organization expense (Note 1) 6,425
- ----------------------------------------------------------------------------------------------------
Other accrued expenses 21,834
- ----------------------------------------------------------------------------------------------------
Total liabilities 28,328
- ----------------------------------------------------------------------------------------------------
Net assets $2,212,553
Represented by
- ----------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $1,791,253
- ----------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 52,791
- ----------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 106,733
- ----------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 261,776
- ----------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $2,212,553
Computation of net asset value and offering price
- ----------------------------------------------------------------------------------------------------
Net asset value and redemption price per share ($2,212,553 divided by 207,325 shares) $10.67
- ----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25 of $10.67) * $11.32
- ----------------------------------------------------------------------------------------------------
* 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
Year ended August 31, 1996
<S> <C>
Investment Income:
- ------------------------------------------------------------------------------------------------
Dividends $120,521
- ------------------------------------------------------------------------------------------------
Interest 5,409
- ------------------------------------------------------------------------------------------------
Total investment income 125,930
Expenses:
- ------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 14,060
- ------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 6,273
- ------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 1,655
- ------------------------------------------------------------------------------------------------
Administrative services (Note 2) 40
- ------------------------------------------------------------------------------------------------
Registration fees 97
- ------------------------------------------------------------------------------------------------
Auditing 7,658
- ------------------------------------------------------------------------------------------------
Legal 4,655
- ------------------------------------------------------------------------------------------------
Postage 42
- ------------------------------------------------------------------------------------------------
Other 4,807
- ------------------------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (19,662)
- ------------------------------------------------------------------------------------------------
Total expenses 19,625
- ------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (2,115)
- ------------------------------------------------------------------------------------------------
Net expenses 17,510
- ------------------------------------------------------------------------------------------------
Net investment income 108,420
- ------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 119,044
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments during the year 129,870
- ------------------------------------------------------------------------------------------------
Net gain on investments 248,914
- ------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $357,334
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets For the period
January 3, 1995
Year ended (commencement of
August 31 operations) to
1996 August 31, 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------
Net investment income $108,420 $57,930
- ---------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 119,044 (1,677)
- ---------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 129,870 131,906
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 357,334 188,159
- ---------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------
From net investment income (99,920) --
- ---------------------------------------------------------------------------------------------------------
From net realized gain on investments (13,451) --
- ---------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 139,394 1,621,037
- ---------------------------------------------------------------------------------------------------------
Total increase in net assets 383,357 1,809,196
- ---------------------------------------------------------------------------------------------------------
Net Assets
- ---------------------------------------------------------------------------------------------------------
Beginning of period 1,829,196 20,000
- ---------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment income of
$52,791 and $58,533, respectively) $2,212,553 $1,829,196
- ---------------------------------------------------------------------------------------------------------
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
January 3, 1995
(commencement
Year ended of operations
August 31 to August 31
-------------------------------------
1996 1995
-------------------------------------
<S> <C> <C>
Net asset value, beginning of period $9.49 $8.50
- ---------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------
Net investment income .54(d) .30(d)
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 1.23 .69
- ---------------------------------------------------------------------------------------------------
Total from investment operations 1.77 .99
- ---------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------
From net investment income (.52) --
- ---------------------------------------------------------------------------------------------------
From net realized gain on investments (.07) --
- ---------------------------------------------------------------------------------------------------
Total distributions (.59) --
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $10.67 $9.49
- ---------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 19.53 11.65(e)
- ---------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $2,213 $1,829
- ---------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .98(d) .48(d)(e)
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.40(d) 3.52(d)(e)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover (%) 28.19 5.35(e)
- ---------------------------------------------------------------------------------------------------
Average commission rate paid (c) $.0360 --
- ---------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended August 31, 1996 includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
(c) Average commission rate paid is required for fiscal periods beginning on
or after September 1, 1995.
(d) Reflects an expense limitation in effect during the period (see Note 2). As a result of such
limitation, expenses for the fund for the period ended August 31, 1996 and August 31, 1995
reflect a reduction of $0.10 and $0.21 per share, respectively.
(e) Not annualized.
</TABLE>
Notes to financial statements
August 31, 1996
Note 1
Significant accounting policies
This 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-ended management investment company. The
objective of the fund is to seek capital growth and current income by
investing primarily in equity securities issued by companies in real
estate industries.
The following is a summary of significant accounting policies followed
by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value which is determined using
the last reported sale price, or if no sales are reported-as in the case
of some securities traded over-the-counter -- the last bid price. Short-
term investments having remaining maturities of 60 days or less are
stated at amortized cost, which approximates 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.
E) 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.
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid 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 non-taxable dividends and organization
expenses.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended August 31,
1996, the fund reclassified $14,242 to decrease undistributed net
investment income and $11,425 to increase paid-in-capital, with an
increase to accumulated net realized gains of $2,817. 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 $6,425. 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: 0.70% of the
first $500 million of average net assets, 0.60% of next $500 million,
0.55% of the next $500 million, 0.50% of the next $5 billion, 0.475% of
the next $5 billion, 0.455% of the next $5 billion, 0.44% of the next $5
billion, and 0.43% thereafter 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.
Through November 30, 1996, Putnam Management has voluntarily agreed to
limit expenses to an annual rate of 1.00% of the fund's average net
assets. The fund's expenses subject to this limitation are exclusive of
brokerage, interest, taxes, amortization of deferred organization
expenses, extraordinary expenses and credits from Putnam Fiduciary Trust
Company ("PFTC"), a wholly-owned subsidiary of Putnam Investments, Inc.,
if any.
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.
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 certain Putnam funds until distribution in
accordance with the Plan.
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 year ended August 31, 1996, fund expenses were reduced by $2,115
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.
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 to the Plan.
Note 3
Purchase and sales of securities
During the year ended August 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $628,202 and
$547,505, 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:
Year ended
August 31, 1996
- ----------------------------------------------------
Shares Amount
- ----------------------------------------------------
Shares sold 3,279 $33,628
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 12,125 113,370
- ----------------------------------------------------
15,404 146,998
Shares
repurchased (781) (7,604)
- ----------------------------------------------------
Net increase 14,623
$ 139,394
- ----------------------------------------------------
For the period January 3, 1995
(commencement of operations)
to August 31, 1995
- ----------------------------------------------------
Shares Amount
- ----------------------------------------------------
Shares sold 192,412 $1,639,850
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- ----------------------------------------------------
192,412 1,639,850
Shares
repurchased (2,063) (18,813)
- ----------------------------------------------------
Net increase 190,349 $1,621,037
- ----------------------------------------------------
At August 31, 1996, Putnam Management owned 187,606 shares of the fund
(90.4% of shares outstanding), valued at $2,001,756.
Federal tax information
(Unaudited)
The fund has designated 79.27% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
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
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
Peter Carman
Vice President
Brett C. Browchuk
Vice President
Thomas V. Reilly
Vice President
Jeanne L. Mockard
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 Real Estate
Opportunities 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.
27671-403 10/96
