Putnam
Japan
Fund
ANNUAL REPORT
August 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
Dear Shareholder:
As Putnam Japan Fund reached the end of its first fiscal year, Japan's
economy continued to recover slowly but surely from a long and deep
recession. Japanese export volumes have improved somewhat in recent
months largely because the declining value of the yen (compared to the
U.S. dollar) has made the prices of imported Japanese products more
attractive to American consumers.
Japan's economic recovery has hardly been robust, however, and the
country's financial state is far from ideal. Ongoing deflation (negative
inflation) has unsettled the financial industry as Japanese banks have
been forced to write off bad loans linked to declining property values.
Additionally, deflation has contributed to rising unemployment, which,
in turn, has reduced the level of consumer demand for goods and
services. In response, the Japanese government has spent vast amounts of
public funds to boost demand, but with limited success; the more
noticeable result has been a widening of the budget deficit.
Amid this unstable environment, fund managers David Thomas and Robert
Swift have positioned the fund to take advantage of securities that have
the best potential for long-term capital gains. As the growth rate of
the Japanese economy continues to moderate, structural reform at the
corporate level is inevitable. With this in mind, Robert and David seek
to derive the inherent benefits of this reform for your fund.
Your fund's managers do not emphasize certain sectors of the Japanese
economy, but rather look for specific stocks that are trading below what
they believe to be their true values. Often a number of stocks within
one industry offer attractive value; indeed, in the second half of the
fiscal year, Japanese automotive companies and semiconductor producers
benefited considerably from swelling demand in the United States. While
Robert and David took advantage of these trends to a limited degree
during the period, they were careful to avoid the risks of overexposure
to any one sector.
Despite its recent decline, the Japanese yen remains overvalued relative
to the U.S. dollar. Therefore, any improvement in Japan's economy hinges
on the yen's continued decline. For this reason, the fund's managers
maintained currency hedges on roughly 20% of the fund's holdings to
provide a degree of protection for the portfolio's value.
[GRAPHIC OMITTED: Top 10 Holdings, 8/31/96]
Chubu Electric Power, Inc.
Utility
Hitachi, Ltd.
Electronics and electrical equipment
Cosmo Oil Co., Ltd.
Oil and gas
Keiyo Bank
Insurance and finance
Nissan Fire & Marine Insurance Co.
Insurance and finance
Mitsubishi Electric Corp.
Electronics and electrical equipment
Chuo Trust & Banking Co., Ltd.
Insurance and finance
Kumagai Gumi Co., Ltd.
Building and construction
East Japan Railway Co.
Transportation
Mitsui Marine & Fire Insurance Co., Ltd.
Insurance and finance
Footnote reads:
These holdings represent 34.3% of the fund's net assets. Portfolio
holdings will vary over time.
In the coming months, deregulation will continue to be a dominant theme
across Japan's financial landscape. While no official plan for the
deregulation of Japan's economy has yet been announced, it is clear that
the final plan will influence a wide range of industrial sectors in
order to spur a broad-based economic recovery and open Japanese markets
more to global competition. Because international competition has been
scarce in many Japanese industries, prices have been artificially high;
increased global competition most likely would drive prices down in the
short term.
Your fund's managers will continue to search for investments that offer
the potential for growth. They see possibilities among smaller, less
established companies that are not as accustomed to traditional Japanese
ways of doing business and are more adaptable to global competition. At
the same time, the managers anticipate gradually improving opportunities
in Japan's growing service sector.
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. The fund concentrates its investments
in one country and involves more risk than a fund that invests more
broadly.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Japan Fund is designed for investors seeking capital
appreciation primarily through common stocks of Japanese companies.
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
Consumer MSCI
Price Japan
NAV POP Index Index
- -----------------------------------------------------------------------
Life of fund
since 12/28/95 -6.24% -11.64% 2.48% -7.72%
- -----------------------------------------------------------------------
TOTAL RETURN FOR PERIOD ENDED 9/30/96
(most recent calendar quarter)
NAV POP
- -----------------------------------------------------------------------
Life of fund
since 12/28/95 -2.47% -8.09%
- -----------------------------------------------------------------------
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 reflect an expense
limitation currently in effect. Without the expense limitation, total
returns would have been lower. The short-term results of a relatively
new fund, such as this 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 12/29/95
Starting value Ending value
$ 9,425 Fund's class A shares at POP $8,836
$10,000 Consumer Price Index $10,248
$10,000 MSCI Japan Index $9,228
(plot points for 10-year total return mountain chart)
Date/year Fund at POP Consumer Price Index MSCI Japan Index
- ---------- ----------- -------------------- ----------------
12/29/95 9,425 10,000 10,000
1/31/96 9,552 10,059 9,869
2/29/96 9,451 10,091 9,693
3/31/96 9,731 10,143 10,035
4/30/96 10,314 10,182 10,606
5/31/96 9,821 10,202 10,060
6/30/96 9,753 10,208 10,113
7/31/96 9,350 10,228 9,660
8/31/96 8,935 10,248 9,228
Footnote reads:
Past performance is no assurance of future results.
PRICE AND DISTRIBUTION INFORMATION
12/28/95 through 8/31/96
- -----------------------------------------------------------------------
Distributions (number)* 0
- -----------------------------------------------------------------------
Share value: NAV POP
- -----------------------------------------------------------------------
12/28/95 $8.50 $9.02
(inception)
- -----------------------------------------------------------------------
8/31/96 7.97 8.46
- -----------------------------------------------------------------------
* The fund made no distributions during the reporting period. It will
make its initial distribution before the end of calender 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, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 5.75% sales charge for class A
shares.
COMPARATIVE BENCHMARKS
Morgan Stanley Capital International (MSCI) Japan Index is an unmanaged
list of Japanese equity securities, with all values expressed in U.S.
dollars. The indexes assume reinvestment of all distributions and
interest payments and do not take in account brokerage fees or taxes.
Securities in the fund do not match those in the index and performance
of the fund will differ. It is not possible to invest directly in an
index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Japan 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 Japan 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 and brokers, provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
October 11, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
August 31, 1996
<S> <C> <C> <C>
COMMON STOCKS (95.9%) *
NUMBER OF SHARES VALUE
Automotive (4.4%)
- -----------------------------------------------------------------------------------------------
10,000 Fuji Heavy Industries, Inc. + 45,367
17,000 Kayaba Industry Co., Ltd. 87,740
------------
133,107
Building and Construction (7.4%)
- -----------------------------------------------------------------------------------------------
28,000 Kumagai Gumi Co., Ltd. 99,256
15,000 Taisei Corp. 94,912
1,000 Tostem Corp. 28,469
------------
222,637
Chemicals (3.0%)
- -----------------------------------------------------------------------------------------------
4,000 Mitsui Petrochemical Industries 26,890
14,000 Toa Gosei Co., Ltd. 63,772
------------
90,662
Computer Services and Software (0.9%)
- -----------------------------------------------------------------------------------------------
3,000 Fujitsu Ltd. 26,972
Consumer Non Durables (7.6%)
- -----------------------------------------------------------------------------------------------
12 Japan Tobacco, Inc. 88,052
6,000 KAO Corp. 71,081
7,000 Kuraray Co., Ltd. 71,356
------------
230,489
Electronics and Electrical Equipment (9.5%)
- -----------------------------------------------------------------------------------------------
12,000 Hitachi, Ltd. 109,983
16,000 Mitsubishi Electric Corp. 102,415
7,000 NEC Corp. 74,571
------------
286,969
Food and Beverages (3.9%)
- -----------------------------------------------------------------------------------------------
9,000 Kirin Brewery Co., Ltd. 92,570
2,000 Yakult Honsha 26,081
------------
118,651
Insurance and Finance (25.1%)
- -----------------------------------------------------------------------------------------------
12,000 Akita Bank Ltd. 78,795
10,000 Chuo Trust & Banking Co., Ltd. 101,938
3,000 Fuji Fire & Marine Insurance 15,704
5,000 Hitachi Credit Corp. 86,785
21,000 Keiyo Bank 105,106
14,000 Mitsui Marine & Fire Insurance Co., Ltd. (The) 97,070
4,000 Nippon Shinpan Co. 25,494
16,000 Nissan Fire & Marine Insurance Co. 103,297
2,000 Orix Corp. 74,571
6,000 Tokio Marine & Fire Insurance Co., Ltd. (The) 68,326
------------
757,086
Metals and Mining (6.8%)
- -----------------------------------------------------------------------------------------------
4,000 Hitachi Metals Ltd. 36,734
32,000 Kobe Steel Ltd. + 83,754
6,000 Nippon Yakin Kogyo Co. 24,024
22,000 Sumitomo Metal Industries Ltd. 62,026
------------
206,538
Oil and Gas (6.2%)
- -----------------------------------------------------------------------------------------------
19,000 Cosmo Oil Co., Ltd. 109,927
8,000 Showa Shell Sekiyu 77,142
------------
187,069
Paper and Forest products (2.6%)
- -----------------------------------------------------------------------------------------------
13,000 Nippon Paper Industries Co., Ltd. 77,601
Pharmaceuticals (1.8%)
- -----------------------------------------------------------------------------------------------
4,000 Kaken Pharmaceutical Co. 30,379
3,000 Shionogi & Co., Ltd. 23,391
------------
53,770
Retail (0.6%)
- -----------------------------------------------------------------------------------------------
1,000 Aoki International Co., Ltd. 19,286
Transportation (4.9%)
- -----------------------------------------------------------------------------------------------
21 East Japan Railway Co. 97,970
6,000 Kamigumi Co., Ltd. 48,710
------------
146,680
Utilities (11.2%)
- -----------------------------------------------------------------------------------------------
5,000 Chubu Electric Power, Inc. 110,203
3,000 Hokuriku Electric Power Co. 64,744
4,000 Kyushu Electric Power Inc. 85,591
11 Nippon Telegraph and Telephone Corp. 77,885
------------
338,423
------------
Total Common Stocks (cost $3,193,521) $ 2,895,940
SHORT-TERM INVESTMENTS (5.1%)*(Cost $155,046)
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------
$155,000 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 $155,091 for an effective yield of 5.26% $155,046
- -----------------------------------------------------------------------------------------------
Total Investments (cost $3,348,567) *** $ 3,050,986
- -----------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $3,019,743.
*** The aggregate identified cost on a tax basis is $3,348,746, resulting in gross unrealized
appreciation and depreciation of $19,448 and $317,208, respectively, or net unrealized
depreciation of $297,760.
+ Non-income-producing security.
<CAPTION>
Forward Currency Contracts to Sell Outstanding at August 31, 1996
Market Aggregate Delivery Unrealized
Value Face Value Date Depreciation
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Japanese Yen $600,088 $593,655 1/6/97 $(6,433)
- ---------------------------------------------------------------------------
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 $3,348,567) (Note 1) $3,050,986
- -----------------------------------------------------------------------------------------------------------
Cash 284
- -----------------------------------------------------------------------------------------------------------
Dividends receivable 953
- -----------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 95
- -----------------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 3,494
- -----------------------------------------------------------------------------------------------------------
Total assets 3,055,812
Liabilities
- -----------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,706
- -----------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 62
- -----------------------------------------------------------------------------------------------------------
Payable for organizational expenses (Note 1) 3,662
- -----------------------------------------------------------------------------------------------------------
Payable for auditing fees 16,306
- -----------------------------------------------------------------------------------------------------------
Payable for legal fees 2,800
- -----------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 6,433
- -----------------------------------------------------------------------------------------------------------
Other accrued expenses 2,100
- -----------------------------------------------------------------------------------------------------------
Total liabilities 36,069
- -----------------------------------------------------------------------------------------------------------
Net assets $3,019,743
Represented by
- -----------------------------------------------------------------------------------------------------------
Paid-in capital (Note 4) $3,218,146
- -----------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 34,205
- -----------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign currency transactions (Note 1) 71,409
- -----------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and liabilities in foreign currencies (304,017)
- -----------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $3,019,743
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share ($3,019,743 divided by 378,808 shares) $7.97
- -----------------------------------------------------------------------------------------------------------
Offering price per share (100/94.25 of $7.97)* $8.46
- -----------------------------------------------------------------------------------------------------------
* 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
Period ended August 31, 1996
<S> <C>
Investment Income:
- -----------------------------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $2,417) $13,695
- -----------------------------------------------------------------------------------------------------------------------
Interest 6,416
- -----------------------------------------------------------------------------------------------------------------------
Total investment income 20,111
Expenses:
- -----------------------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) $17,294
- -----------------------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,091
- -----------------------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 389
- -----------------------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 17
- -----------------------------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 168
- -----------------------------------------------------------------------------------------------------------------------
Reports to shareholders 3,909
- -----------------------------------------------------------------------------------------------------------------------
Auditing 16,306
- -----------------------------------------------------------------------------------------------------------------------
Legal 5,667
- -----------------------------------------------------------------------------------------------------------------------
Postage 368
- -----------------------------------------------------------------------------------------------------------------------
Registration fees 99
- -----------------------------------------------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (16,883)
- -----------------------------------------------------------------------------------------------------------------------
Total expenses 31,425
- -----------------------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (1,888)
- -----------------------------------------------------------------------------------------------------------------------
Net expenses 29,537
- -----------------------------------------------------------------------------------------------------------------------
Net investment loss (9,426)
- -----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 71,408
- -----------------------------------------------------------------------------------------------------------------------
Net realized gain on forward currency contracts and foreign currency translation (Note 1) 43,470
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of forward currency contracts and foreign currency translation during the period (6,436)
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (297,581)
- -----------------------------------------------------------------------------------------------------------------------
Net loss on investments (189,139)
- -----------------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(198,565)
- -----------------------------------------------------------------------------------------------------------------------
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 loss $(9,426)
- --------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 114,878
- --------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and liabilities in foreign currencies (304,017)
- --------------------------------------------------------------------------------------------------------
Net decrease in assets resulting from operations (198,565)
- --------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 218,308
- --------------------------------------------------------------------------------------------------------
Total increase in net assets 19,743
- --------------------------------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------------------------------
Beginning of period 3,000,000
- --------------------------------------------------------------------------------------------------------
End of period (undistributed net investment income of $34,205) $3,019,743
- --------------------------------------------------------------------------------------------------------
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 loss (.02)(c)
- ---------------------------------------------------------------------------------
Net realized and unrealized loss on investments (.51)
- ---------------------------------------------------------------------------------
Total from investment operations (.53)
- ---------------------------------------------------------------------------------
Net asset value, end of period $7.97
- ---------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) (6.24)(d)
- ---------------------------------------------------------------------------------
Net assets, end of period (in thousands) $3,020
- ---------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .98(c)(d)
- ---------------------------------------------------------------------------------
Ratio of net investment loss to average net assets (%) (.29)(c)(d)
- ---------------------------------------------------------------------------------
Portfolio turnover (%) 46.39(d)
- ---------------------------------------------------------------------------------
Average commission rate paid $.0508
- ---------------------------------------------------------------------------------
(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 during the period (Note 2). As a result of such
limitation, expenses of the fund reflect a reduction of approximately $0.04 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 capital appreciation by investing
primarily in common stocks and equity securities, including securities
convertible into common stocks or other equity securities, of Japanese
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 bid price. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value and other investments are stated at fair
market value following procedures approved by the Trustees. Foreign
securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rate.
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) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is
determined using forward currency exchange rates supplied by a quotation
service. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is "marked-to-market" daily and
the change in market value is recorded as an unrealized gain or loss.
When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. The fund could be
exposed to risk if the value of the currency changes unfavorably, if the
counterparties to the contracts are unable to meet the terms of their
contracts or if the fund is unable to enter into a closing position.
G) 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.
H) 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 realized and unrealized gains and
losses on foreign currency contracts 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 period December 28,
1995 (commencement of operations) to August 31, 1996, the fund
reclassified $43,631 to increase undistributed net investment income and
$162 to decrease paid-in-capital, with a decrease to accumulated net
realized gain on investments of $43, 469. The calculation of net
investment income per share in the financial highlights table excludes
these adjustments.
I) 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.
J) 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
based 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: 0.80% of the
first $500 million of average net assets, 0.70% of the next $500
million, 0.65% of the next $500 million, 0.60% of the next $5 billion,
0.575% of the next $5 billion, 0.555% of the next $5 billion, 0.54% of
the next $5 billion and 0.53% 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 December 31, 1996, 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 1.45% 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 of 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. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the period December 28, 1995 (commencement of operations) to August
31, 1996, fund expenses were reduced by $1,888 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.
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 net 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 $4,549,604 and $1,427,491,
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 232,144 $1,985,263
Shares
repurchased (206,277) (1,766,955)
- ----------------------------------------------------
Net increase 25,867 $218,308
- ----------------------------------------------------
Note 5
Initial capitalization and offering of shares
The Trust 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 $3,000,000, and
$3,662 of initial organizational expenses, and the issuance of 352,941
shares to Putnam Investments, Inc.
At August 31, 1996, Putnam Investments, Inc., owned 352,941 shares of
the fund (93.2% of shares outstanding), valued at $2,812,940.
Federal tax information
(Unaudited)
For the period, interest and dividends from foreign countries were
$16,112 or $0.043 per share. Taxes paid to foreign countries were $2,417
or $0.006 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
David K. Thomas
Vice President and Fund Manager
Robert Swift
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 Japan 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.
27669-2AWA 10/96
