Putnam
Emerging
Markets
Fund
ANNUAL REPORT
August 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "As investors in the world's emerging markets, we take long-term
positions and, given the amount of volatility that can affect
these markets, must invest with great conviction. Investors in
emerging markets funds should consider their tolerance for such
volatility in exchange for potential long-term rewards."
-- Tom Haslett, fund manager
Putnam Emerging Markets Fund
* According to the World Bank, developing countries will double their
share of global output over the next 25 years -- levels not seen
since the early 19th century.
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
18 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Investing in the world's emerging markets requires a breadth and depth of
expertise few investment management firms are equipped to provide. Besides the
economic and investment aspects of such an undertaking, there is a wide
spectrum of cultural and governmental considerations to weigh. Because many of
these are untried markets and others are subject to ongoing political
uncertainties, what is true today may not be true tomorrow.
Thus, it is not surprising that Putnam Emerging Markets Fund has five
managers, each with a specific field of expertise. In addition, this
management team is backed by a full array of analysts with access to a
state-of-the-art research capability. Offices strategically located in London
and Tokyo feed a continuing stream of information to Putnam's Boston
headquarters.
In the following report, your fund's managers review performance for the
fiscal year ended August 31, 1997, and look at prospects for the fiscal year
just begun.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
October 15, 1997
Report from the Fund Managers
Thomas R. Haslett
J. Peter Grant
Deborah S. Farrell
Stephen Oler
Carmel Peters
During Putnam Emerging Markets Fund's fiscal year, the world's developing
markets exhibited much of the opportunities and pitfalls often associated with
these types of investments. Nevertheless, over its short life, your fund at
net asset value has outstripped the Morgan Stanley Capital International
Emerging Markets Index; class A shares returned 7.82% at net asset value and
1.59% at public offering price for the fiscal year ended August 31, 1997, and
30.40% over the fund's 20-month life at net asset value, compared with 6.10%
and 12.65% returns for the index over the same periods, respectively. Please
refer to pages 9 and 10 of this report to view performance of other share
classes.
While we are pleased to report that we have outperformed our benchmark, we
believe that investing in emerging markets must be part of a strategic
investment plan. Given the enormous economic, social, and political changes
taking place in these markets, investors need to take a long-term view toward
this asset class.
* ASIAN CURRENCY COLLAPSE BRINGS BOTH CHALLENGES AND OPPORTUNITIES
In the last few months of this fiscal year, we witnessed a sharp correction in
Thailand, Malaysia, Indonesia, and the Philippines as these countries'
currencies lost their stability. This, in turn, pushed interest rates higher
and depressed the equity markets in these countries. These events exemplify
the type of volatility that emerging market investors should be able to
accept, and also illustrate the factors that influence the region's markets
and economies. For example, China's export oriented economy is putting
enormous competitive pressure on Southeast Asian export prices. Thailand and
Malaysia have also built up excessive economic capacity in the face of weak
demand for their products. Additionally, the sluggish Japanese economy has
resulted in a weak Japanese yen which magnifies the difficult export market
for many Southeast Asian countries. All these factors served to hurt
consumption, investment, and corporate earnings.
In general, the Asian markets offered divergent returns. For example, Hong
Kong and China showed continued strength and economic conditions in peripheral
Asian countries such as India and Taiwan were strong and stable. However,
Korea is suffering from excess productive capacities, a less competitive labor
force, and the ripple effects of the weak Japanese yen.
Amongst all of this confusion, the shares of some promising companies with
sound businesses are trading at depressed prices. We believe that as the
region's economies gain strength and stability the earnings of these companies
will accelerate. Therefore, because we believe in the long-term potential of
the Asian markets, we will continue to focus on these undervalued stocks.
* LATIN AMERICA STILL PROMISING
This region continued to impress investors as the economic malaise associated
with the Mexican peso crisis of 1994 and 1995 lifted. Mexico's domestic
economy strengthened this year as the nation came through its regional summer
elections with a renewed sense of economic drive. This, combined with Mexico's
strong export growth, offered investors an attractive climate marked by solid
corporate earnings momentum, a much improved political climate, and a stable
interest rate and currency environment.
[GRAPHIC OMITTED: horizontal bar chart COUNTRY ALLOCATION]
COUNTRY ALLOCATION*
Mexico 13.2%
Brazil 12.7%
Taiwan 6.3%
South Africa 5.5%
Argentina 5.1%
India 5.1%
Russia 4.9%
Footnote reads:
*Based on net assets as of 8/31/97. Holdings will vary over time.
Elsewhere in Latin America, Brazil provided strong performance. Moves to
privatize the huge state controlled sectors -- electric power, telephony, and
mineral resources -- drove this market. Continued economic reforms in these
state companies and their sharp share price appreciation, however, mask a
generally depressed economy. Argentina, on the other hand, has enjoyed a very
strong economic bounce as interest rates and unemployment levels have
declined. Chile provided less remarkable returns as its conservative economic
policies are more mature than other countries in the region. The stock markets
in the smaller Andean countries (Peru, Colombia, and Venezuela) were also
strong during the period reflecting the region's broad-based recovery.
Economic growth in many parts of Latin America along with continued economic
and political reform give us optimism for the region. In particular, we are
impressed with the strong growth in Argentina and Mexico. Additionally, we
believe many Latin American companies are ready to compete on a global scale.
Given these factors, we have heavily weighted the fund toward stocks in this
region.
* RUSSIA, EASTERN EUROPE, SOUTH AFRICA OFFER MIXED BAG
Among the remaining regions targeted by the fund, the biggest story was
Russia. A combination of political reforms and unusual levels of liquidity
overcame sluggish economic statistics to power this stock market to new highs.
Because of its rich natural resources, its high level of human capital, and an
improving political environment, we believe Russia has enormous potential for
long-term investors. The sharp stock market appreciation during 1996 and 1997,
however, already reflects these positive factors.
Consequently, we selectively broadened our exposures in other regional
emerging markets in order to seek new investment opportunities. During the
period, we targeted companies in Hungary, Poland, and Portugal. We also
initiated investments in Turkey and Israel and they provided solid returns for
the fund. In Africa we confined our activity to South Africa. This very large
market offers some of the developing world's best corporate management teams.
Unfortunately, South Africa's macroeconomic environment has been disappointing
because of an overvalued currency, high interest rates, weak commodity prices,
and an uncertain political situation.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
PanAmerican Beverages, Inc. Class A
Food and beverages
Cia de Telecomunicaciones de Chile S.A. ADR
Telecommunications
Tatneft ADR
Oil and gas
Fomento Economico Mexicano, S.A. de C.V. Class B
Food and beverages
Alfa S.A. 144A cv. sub. notes
Conglomerates
Grupo Televisa S.A. GDR
Broadcasting
Lukoil Holding ADR
Oil and gas
Banco Frances del Rio de la Plata S.A.
Insurance and finance
Investec Consultadoria International S.A.
Insurance and finance
Cemex S.A. de C.V. Class B
Building and construction
Footnote reads:
These holdings represent 17.1% of the fund's net
assets as of 8/31/97. Portfolio holdings will vary
over time.
*IMPROVEMENTS TO OUR INVESTMENT PROCESS
During the past year, we increased the number of investment professionals
working with your fund. Along with the overall expansion of Putnam's
international equity capabilities, we have brought on experts in Asia and
Latin America. These individuals can provide enormous leverage in meeting the
investment challenges that the emerging markets present.
Our team is organized to provide a specific "top-down" country and regional
focus along with a comprehensive "bottom-up" focus on industries and stocks.
We concentrate our resources on three explicit regions: Latin America,
emerging Europe/Middle East/Africa, and Asia. Each of these regions offers
investors tremendous diversity and -- as the fiscal year just ended
illustrates -- a remarkable level of diverse performance.
In addition to the people that have joined us, we are devoting an enormous
amount of resources to apply more quantitative techniques in our country and
stock selection process. By harnessing the processing power of our computer
hardware, we can manage enormous amounts of data more efficiently to enhance
the team's investment discipline.
* OUR OUTLOOK: CALM BUT CAUTIOUS OPTIMISM
While we have experienced some difficult conditions in parts of the emerging
markets, we believe many of the changes now taking place around the world may
create some attractive long-term investment opportunities for the fund.
Additionally, we believe that many of the markets we are investing in are well
positioned to benefit from the continuing global economic expansion.
Therefore, we will continue to apply our disciplined investment process in
order to find attractive markets and stocks.
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 8/31/97, there is no guarantee the fund will continue to hold
these securities in the future. International investing has certain risks,
including currency fluctuations, economic instability, and political
developments. Past performance is no guarantee of future results. Additional
risks, including illiquidity and volatility, may be associated with
emerging-markets securities.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Emerging Markets Fund is designed for investors seeking capital
appreciation through common stocks of companies operating primarily in
developing economies.
TOTAL RETURN FOR PERIODS ENDED 8/31/97
Class A Class B Class M
(inception date) (12/28/95) (10/30/96) (10/30/96)
NAV POP NAV CDSC NAV POP
- -------------------------------------------------------------------------
1 year 7.82% 1.59% 7.01% 2.01% 7.21% 3.49%
- -------------------------------------------------------------------------
Life of fund 30.40 22.88 28.78 24.78 29.19 24.66
Annual average 17.12 13.05 16.25 14.09 16.47 14.02
- -------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 8/31/97
MSCI Consumer
Emerging Markets Index Price Index
- -------------------------------------------------------------------------
1 year 6.10% 2.23%
- -------------------------------------------------------------------------
Life of fund 12.65 4.76
Annual average 7.41 2.83
- -------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 5.75% for class A shares and 3.50% for class M shares.
One- and life- of-fund returns for class B shares reflect the applicable
contingent deferred sales charges (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and, in the case of class B and class M shares,
the higher operating costs applicable to such shares. All returns assume
reinvestment of distributions at NAV and represent past performance; they
do not guarantee future results. Investment return and principal value
will fluctuate so that an investor's shares when redeemed may be worth
more or less than their original cost. Performance does not take into
account any adjustments for taxes on reinvested dividends. Performance
data reflects an expense limitation previously or currently in effect.
Without the expense limitation total returns would have been lower.
[GRAPHIC OMITTED: GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 12/28/95
Fund's class A MSCI Emerging
Date/year shares at POP Markets Index CPI
12/28/95 9425 10000 10000
2/29/96 10133 10321 10005
5/31/96 11785 10999 10010
8/31/96 11397 10617 10012
11/30/96 11452 10593 10015
2/28/97 12951 10746 10018
5/31/97 12962 11824 10019
8/31/97 12288 11265 10476
Footnote reads:
Past performance is no assurance of future results. At the end of
the same time period, a $10,000 investment in the fund's class B
shares would have been valued at $12,878 and $12,478 with a redemption
on 8/31/97; a $10,000 investment in the fund's class M shares would
have been valued at $12,919 ($12,466 at public offering price). See
first page of performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 8/31/97
Class A Class B Class M
- -------------------------------------------------------------------------
Distributions (number) 1 1 1
- -------------------------------------------------------------------------
Income $0.015 $0.013 $0.014
- -------------------------------------------------------------------------
Capital gains
- -------------------------------------------------------------------------
Long term -- -- --
- -------------------------------------------------------------------------
Short term 0.119 0.119 0.119
- -------------------------------------------------------------------------
Total $0.134 $0.132 $0.133
- -------------------------------------------------------------------------
Share value NAV POP NAV NAV POP
- -------------------------------------------------------------------------
8/31/96 $10.28 $10.91 -- -- --
- -------------------------------------------------------------------------
10/30/96 -- -- $9.95 $9.95 $10.31
- -------------------------------------------------------------------------
8/31/97 10.94 11.61 10.87 10.89 11.28
- -------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/97
(most recent calendar quarter)
Class A Class B Class M
(inception date) (12/28/95) (10/30/96) (10/30/96)
NAV POP NAV CDSC NAV POP
- -------------------------------------------------------------------------
1 year 14.43% 7.82% 13.60% 8.60% 13.92% 9.96%
- -------------------------------------------------------------------------
Life of fund 38.39 30.41 36.72 32.72 37.13 32.33
Annual average 20.27 16.28 19.45 17.45 19.65 17.25
- -------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares when sold may
be worth more or less than their original cost. See first page of
performance section for performance calculation method.
TERMS AND DEFINITIONS
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.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
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 and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Morgan Stanley Capital International (MSCI) Emerging Markets Index* is an
unmanaged list of equity securities from emerging markets with all values
expressed in U.S. dollars.
Consumer Price Index (CPI ) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and
interest and dividend payments and do not take in account brokerage
fees or taxes. Securities in the fund 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
To the Trustees and Shareholders of
Putnam Emerging Markets 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
Markets Fund (the "fund") (formerly Putnam Emerging Growth Fund) at August 31,
1997, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, 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 audits. We conducted our
audits 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 audits, which included confirmation of investments owned at August 31,
1997 by correspondence with the custodian and the application of alternative
auditing procedures where investments purchased were not yet received by the
custodian, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
October 15, 1997
Portfolio of investments owned
August 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS (79.0%) *
NUMBER OF SHARES VALUE
Argentina (5.1%)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
32,000 Banco De Galicia y Buenos Aires S.A. de C.V. ADR $ 952,500
125,600 Banco Frances del Rio de la Plata S.A. 1,382,706
9,600 Inversiones y Representaciones S.A. IRSA, GDR 426,600
23,000 Telefonica de Argentina S.A. ADR 797,813
33,400 YPF S.A. ADR 1,087,588
--------------
4,647,207
Brazil (10.0%)
- ------------------------------------------------------------------------------------------------------------
92,000 Banco Bradesco S.A. ADR 893,035
26,000 Brazil Realty S.A. 144A GDR + 669,500
4,000 Centrais Eletricas de Santa Catarina S.A. 144A GDR + 534,000
16,340 CIA Paranaense De Energia-Copel + 246,941
64,000 Companhia Brasileira de Distribuicao Grupo Pao
de Acucar ADR + 1,312,000
25,900 Companhia Energetica de Minas Gerais S.A. (Cemig) ADR 1,113,700
5,400 Companhia Paulista de Forca e Luz CPFL 929,841
15,100 Compania Siderurgica Nacional 511,724
520 Empresa Nacional De Compercio, Redito E Participacoes S.A.
(ENCOPAR) 62
450 Light Participacoes, S.A. + 168,575
48,962 Multicanal Participacoes S.A. ADR + 514,101
37,000 Petroleo Brasileiro S.A.-Petrobras ADR 928,389
11,500 Telebras Co. ADR 1,357,000
--------------
9,178,868
Canada (0.7%)
- ------------------------------------------------------------------------------------------------------------
100,000 Hurricane Hydrocarbons Ltd. + 648,462
Chile (2.0%)
- ------------------------------------------------------------------------------------------------------------
62,000 Cia de Telecomunicaciones de Chile S.A. ADR 1,863,875
China/Hong Kong (4.1%)
- ------------------------------------------------------------------------------------------------------------
370,000 Beijing Datang Power Generation Co., Ltd. + 199,348
270,000 Cheung Kong Infrastructure Holdings 790,941
476,000 China Southern Airlines Co., Ltd. + 305,601
351,000 Guangdong Kelon Elec Holding 437,108
13,000 Guoco Group Ltd. 50,497
330,000 New World Infrastructure Ltd. + 924,119
962,000 Qingling Motors Co. + 543,135
1,400,000 Sa Sa International Holdings Ltd. + 478,771
--------------
3,729,520
Hungary (1.1%)
- ------------------------------------------------------------------------------------------------------------
50,700 Mol Magyar Olaj-es Gazipari Rt. 144A GDR 1,012,986
India (4.8%)
- ------------------------------------------------------------------------------------------------------------
17,000 BSES Ltd. GDR + 289,000
1,950 East India Hotels Ltd. GDR 26,325
90,000 Gujarat Ambuja Cements Ltd. GDR + 729,000
26,900 Hindalco Industries Ltd. GDR + 796,913
8,400 Hindustan Petroleum Corp. Ltd. GDR 110,347
15,000 Indian Hotels, Ltd. 144A GDR + 273,750
20,000 Larsen & Toubro Ltd. GDR + 247,728
16,000 Ranbaxy Laboratories GDR Ltd. 338,800
30,600 State Bank of India GDR + 596,700
66,000 Tata Engineering & Locomotive Co., Ltd. GDR + 594,000
28,100 Videsh Sanchar Nigam Ltd. GDR + 407,450
--------------
4,410,013
Indonesia (2.8%)
- ------------------------------------------------------------------------------------------------------------
100,000 PT Astra International Inc. 220,893
210,000 PT Daya Guna Samudera + 287,675
100,000 PT Bank Internasional Indonesia 28,254
540,000 PT Indah Kiat Pulp & Paper Corp. 184,934
177,000 PT Indah Kiat Pulp & Paper Corp. Class F 69,710
250,000 PT Kawasan Industri Jababeka 184,078
22,000 PT Pasifik Satelit Nusantara ADR + 310,750
206,000 PT Ramayana Lestari Sentosa 373,909
46,000 PT Telekomunikasi Indonesia ADR + 902,750
--------------
2,562,953
Israel (2.3%)
- ------------------------------------------------------------------------------------------------------------
316,600 Bank Hapoalim Ltd. + 685,757
204,800 Super Sol Ltd. + 627,557
22,500 Tadiran Ltd. 767,929
--------------
2,081,243
Malaysia (3.6%)
- ------------------------------------------------------------------------------------------------------------
207,000 Berjaya Sports Toto Berhad 566,154
100,000 IJM Corp. Berhad 108,718
396,000 IOI Corp. Berhad 354,708
134,000 Kentucky Fried Chicken Holdings Berhad 284,034
220,000 Malakoff Berhard 511,453
81,000 Perusahaan Otomobil Nasional Berhad 235,385
162,000 Public Bank Berhad 152,862
233,000 Road Builder (M) Holdings Berhad 326,598
369,000 Tan Chong Motor Holdings Berhad 388,554
89,000 The New Straits Times Press Berhad 395,556
--------------
3,324,022
Mexico (11.5%)
- ------------------------------------------------------------------------------------------------------------
246,300 Cemex S.A. de C.V. Class B + 1,360,442
230,500 Fomento Economico Mexicano, S.A. de C.V. Class B 1,592,202
26,000 Grupo Accion, S.A. de C.V. 144A ADR + 325,000
47,200 Grupo Imsa S.A. de C.V. ADR + 1,357,000
47,600 Grupo Televisa S.A.GDR 1,552,950
288,000 Kimberly-Clark de Mexico, S.A. de C.V. Class A 1,291,811
62,500 PanAmerican Beverages, Inc. Class A 1,878,906
26,200 Telefonos de Mexico S.A. ADR Class L 1,201,925
--------------
10,560,236
Philippines (2.7%)
- ------------------------------------------------------------------------------------------------------------
623,000 Ayala Land, Inc. Class B 310,465
3,792,300 Belle Corp. + 604,752
60,000 Benpres Holdings Corp. GDR + 285,000
694,600 Fil-Estate Land, Inc. 79,614
2,282,100 International Container Terminal Services, Inc. + 492,812
135,700 Petron Corp. + 19,611
24,600 Philippine Long Distance Telephone Co. ADR 621,150
1,300,000 Solid Group, Inc. 98,472
--------------
2,511,876
Poland (1.5%)
- ------------------------------------------------------------------------------------------------------------
27,100 @Entertainment, Inc. + 416,651
13,200 Bank Handlowy 144A + 166,425
64,000 KGHM Polska Miedz S.A. GDR + 752,000
--------------
1,335,076
Portugal (3.0%)
- ------------------------------------------------------------------------------------------------------------
56,500 Colep-Companhia Portuguesa de Embalagens + 969,469
14,700 Electricidade de Portugal S.A. + 228,772
41,900 Investec Consultoria Internacional S.A. + 1,369,431
2,700 Telecel-Comunicacaoes Pessoais, S.A. + 193,050
--------------
2,760,722
Russia (4.9%)
- ------------------------------------------------------------------------------------------------------------
7,000 Mosenergo 144A ADR 316,750
13,600 Tatneft ADR 1,720,400
15,700 Lukoil Holding ADR 1,413,000
2,600,000 Unified Energy Systems 1,001,000
--------------
4,451,150
South Africa (5.5%)
- ------------------------------------------------------------------------------------------------------------
168,750 Billiton PLC 651,114
22,000 Energy Africa Ltd. + 563,200
72,000 Engen Ltd. 383,713
127,500 First Natl Bank Holdings Ltd. 1,005,649
45,000 Gencor Ltd. 113,675
56,250 Gencor Ltd. Rights + 215,839
401,200 Lonrho PLC 791,966
101,200 Sasol Ltd. 1,348,327
--------------
5,073,483
South Korea (3.8%)
- ------------------------------------------------------------------------------------------------------------
15,000 Hansol Paper Co. 370,000
13,100 Housing & Commercial Bank GDR + 225,975
7,290 Hyundai Electronics Industries Co. + 290,790
30,304 Kookmin Bank GDR + 427,892
9,570 Kookmin Bank 146,591
35,000 Korea Electric Power Corp. 917,777
4,700 Samsung Electronics 144A GDR 254,975
330 SK Telecom Co., Ltd. 241,868
67,900 SK Telecom Co., Ltd. ADR 611,100
--------------
3,486,968
Taiwan (6.3%)
- ------------------------------------------------------------------------------------------------------------
150,250 Acer Inc. + 440,985
14,500 Ase Test Limited + 1,058,500
22,000 Asustek Computer, Inc. + 497,345
554,910 Bank Sinopac + 480,844
46,600 China Steel Corp. GDR 932,000
428,000 Chung Hwa Pulp Corp. 391,810
119,800 Delta Electronics, Inc. 866,478
30,000 Siliconware Precision Industries Co. GDR + 637,500
600,000 U-Ming Marine Transport Corp. 471,698
17,000 Yieh Phui Enterprise 17,523
--------------
5,794,683
Thailand (0.9%)
- ------------------------------------------------------------------------------------------------------------
40,300 Advanced Info Service Public Co., Ltd. 190,050
106,600 Electricity Generating Public Co. Ltd. 187,346
200,000 Industrial Finance Corp. of Thailand (The) 158,172
25,900 PTT Exploration & Production PLC 276,145
--------------
811,713
Turkey (1.4%)
- ------------------------------------------------------------------------------------------------------------
75,000 Haci Omer Sabanci Holdings ADR + 600,000
35,500 Yapi ve Kredi Bankasi A.S. GDR + 718,875
--------------
1,318,875
United Kingdom (1.0%)
- ------------------------------------------------------------------------------------------------------------
50,000 Ramco Energy PLC ADR + 918,750
--------------
Total Common Stocks (cost $77,709,622) $ 72,482,681
CONVERTIBLE BONDS AND NOTES (2.2%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 950,000 Alfa S.A. de 144A cv. sub. notes 8s, 2000 (Mexico) $ 1,555,625
270,000 Mahindra & Mahindra Ltd. 144A cv. bonds 5s, 2001 (India) 280,800
190,000 Qingling Motors Co., Ltd. 144A cv. bonds 3 1/2s, 2002 (China) 193,800
--------------
Total Convertible Bonds and Notes (cost $1,719,674) $ 2,030,225
PREFERRED STOCKS (2.7%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
38,400 Banco Bradesco S.A. BRC .379 pfd. (Brazil) $ 379,850
2,200 Banco Itau S.A. BRC 6.86 no par value (NPV) pfd. (Brazil) 1,261,403
520 Companhia de Tecidos Norte de Minas Coteminas
BRC 10.957 NPV (Brazil) 190,506
2,700 Petroleo Brasileiro S.A. BRC 6.258 pfd. (Brazil) 647,921
1 Telecomunicacoes do Rio de Janeiro Telerj S.A.
BRC 4.319 pfd. (Brazil) + 42
--------------
Total Preferred Stocks (cost $2,076,158) $ 2,479,722
SHORT-TERM INVESTMENTS (5.7%) * (cost $5,205,406)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 5,203,000 Interest in $453,719,000 joint repurchase agreement
dated August 29, 1997, with SBC Warburg due
September 2, 1997, with various U.S. Treasury obligations --
maturity value of $5,206,209 for an effective yield of 5.55% $ 5,205,406
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $86,710,860) *** $ 82,198,034
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $91,667,955.
*** The aggregate identified cost on a tax basis is $87,193,756,
resulting in gross unrealized appreciation and depreciation of
$5,175,704 and $10,171,426, respectively, or net unrealized
depreciation of $4,995,722.
+ 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, or GDR after the name of a foreign holding stands for
American Depository Receipts and Global Depository Receipts,
respectively, representing ownership of foreign securities
on deposit with a domestic custodian bank.
The fund had the following industry group concentrations of
greater than 10% at August 31, 1997 (as a percentage of net
assets):
Insurance and Finance 12.7%
Oil and Gas 10.9
Utilities 10.2
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
August 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $86,710,860) (Note 1) $82,198,034
- ---------------------------------------------------------------------------------------------------
Cash 584,832
- ---------------------------------------------------------------------------------------------------
Foreign currency (cost $839,607) 841,939
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 90,480
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,285,713
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 11,454,932
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 3,620
- ---------------------------------------------------------------------------------------------------
Total assets 96,459,550
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 13,882
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 4,015,349
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 213,472
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 353,622
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 65,848
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 669
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 859
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 61,934
- ---------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 3,662
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 62,298
- ---------------------------------------------------------------------------------------------------
Total liabilities 4,791,595
- ---------------------------------------------------------------------------------------------------
Net assets $91,667,955
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $95,022,640
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (104,516)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investment and
foreign currency transactions (Note 1) 1,290,758
- ---------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets
and liabilities in foreign currencies (4,540,927)
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $91,667,955
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($49,580,806 divided by 4,532,962 shares) $10.94
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $10.94)* $11.61
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($38,044,485 divided by 3,499,614 shares)** $10.87
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($4,042,664 divided by 371,119 shares) $10.89
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $10.89)* $11.28
- ---------------------------------------------------------------------------------------------------
* 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.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended August 31, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $36,728) $ 488,285
- --------------------------------------------------------------------------------------------------
Interest 263,930
- --------------------------------------------------------------------------------------------------
Total investment income 752,215
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 511,690
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 294,157
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 3,859
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,524
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 59,173
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 166,698
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 12,463
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 22
- --------------------------------------------------------------------------------------------------
Reports to shareholders 21,634
- --------------------------------------------------------------------------------------------------
Registration fees 46,875
- --------------------------------------------------------------------------------------------------
Auditing 29,471
- --------------------------------------------------------------------------------------------------
Legal 5,860
- --------------------------------------------------------------------------------------------------
Postage 4,987
- --------------------------------------------------------------------------------------------------
Other 1,996
- --------------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (135,218)
- --------------------------------------------------------------------------------------------------
Total expenses 1,027,191
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (56,275)
- --------------------------------------------------------------------------------------------------
Net expenses 970,916
- --------------------------------------------------------------------------------------------------
Net investment loss (218,701)
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,435,121
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (2,271)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (28,093)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (4,855,356)
- --------------------------------------------------------------------------------------------------
Net loss on investments (3,450,599)
- --------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(3,669,300)
- --------------------------------------------------------------------------------------------------
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
Year ended operations) to
August 31 August 31
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income (loss) $ (218,701) $ 2,953
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 1,432,850 102,998
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments
and assets and liabilities in foreign currencies (4,883,449) 342,522
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (3,669,300) 448,473
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (11,345) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (3,758) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (372) --
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (90,004) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (34,401) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (3,163) --
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 92,555,524 476,301
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 88,743,181 924,774
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year (Note 5) 2,924,774 2,000,000
- ----------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net
investment income and undistributed net
investment income of $104,516 and $4,897, respectively) $91,667,955 $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)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
For the Period
Year ended Dec. 28, 1995+
August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $10.28 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (c)(d) (.02) .01
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments .81 1.77
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .79 1.78
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gains
on investments (.12) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.13) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.94 $10.28
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.82 20.94 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $49,581 $2,925
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 2.10 1.25 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%)(c) (.23) .11 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 141.81 45.90 *
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid $.0109 $.0060
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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 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 for class A for the period ended
August 31, 1996. Expenses for the period ended August 31, 1997 reflect a reduction of $.04,
$.03 and $.03 per share for class A, class B and class M, respectively.
(d) Per share net investment income (loss) has been determined on the basis of the weighted average
number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Oct. 30, 1996+
to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $9.95
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (c)(d) (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.05
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gains
on investments (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.87
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.67 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $38,044
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 2.39 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%)(c) (.76)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 141.81
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid $.0109
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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 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 for class A for the period ended
August 31, 1996. Expenses for the period ended August 31, 1997 reflect a reduction of $.04,
$.03 and $.03 per share for class A, class B and class M, respectively.
(d) Per share net investment income (loss) has been determined on the basis of the weighted average
number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Oct. 30, 1996+
to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $9.95
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (c)(d) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gains
on investments (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.88 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $4,043
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) (c) 2.18 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) (c) (.53)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 141.81
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid $.0109
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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 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 for class A for the period ended
August 31, 1996. Expenses for the period ended August 31, 1997 reflect a reduction of $.04,
$.03 and $.03 per share for class A, class B and class M, respectively.
(d) Per share net investment income (loss) has been determined on the basis of the weighted average
number of shares outstanding during the period.
</TABLE>
Notes to financial statements
August 31, 1997
Note 1
Significant accounting policies
Putnam Emerging Markets (the "fund") (formerly Putnam Emerging Growth 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 investing in common stocks and other equity
securities of emerging market companies.
The fund offers class A, class B and class M shares. The fund commenced its
offering of class B and class M shares on October 30, 1996. Class A shares are
sold with a maximum front-end sales charge of 5.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than class A
shares, and are subject to a contingent deferred sales charge, if those shares
are redeemed within six years of purchase. Class M shares are sold with a
maximum front-end sales charge of 3.50% and pay an ongoing distribution fee
that is lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
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, or, if no sales are reported -- as in 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, which determines 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. 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, and 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 appreciation and
depreciation of assets and liabilities in foreign currencies 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 nor for excise tax
on income and capital gains.
G) 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 at
least 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 losses on wash sale transactions, treatment of foreign currency gains and
losses and realized and unrealized gains and losses on passive foreign
investment securities. 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, 1997, the fund reclassified $124,763 to decrease distributions in
excess of net investment income and $7,226 to decrease paid-in-capital, with a
decrease to accumulated net realized gain on investments of $117,537. The
calculation of net investment income per share in the financial highlights
table excludes these adjustments.
H) 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.
I) 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% thereafter.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through November 30, 1997, to the extent that
expenses of the fund (exclusive of brokerage, interest, taxes, deferred
organizational and extraordinary expenses, 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.
As part of the custodian contract between the subcustodian bank and PFTC, the
subcustodian bank has a lien on the securities of the fund to the extent
permitted by the fund's investment restrictions to cover any advances made by
the subcustodian bank for the settlement of securities purchased by the fund.
At August 31, 1997, the payable to the subcustodian bank represents the amount
due for cash advance for the settlement of a security purchased.
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 year ended August 31, 1997, fund expenses were reduced by $56,275
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 $758 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 has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable. The deferred fees remain in the fund and are invested in certain
Putnam funds until distribution in accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans 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 Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees have approved payment by the fund at an annual rate of 0.25%, 1.00%
and 0.75% of the average net assets attributable to class A, class B and class
M shares respectively. The distribution plan became effective October
30, 1996.
For the year ended August 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $104,805 and $5,709 from the sale of
class A and class M shares, respectively and $23,190 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the year
ended August 31, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $7,904 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended August 31, 1997, purchases and sales of investment
securities other than short-term investments aggregated $132,027,239 and
$54,266,587, 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, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
August 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 8,171,536 $ 95,009,853
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 9,734 99,096
- ------------------------------------------------------------
8,181,270 95,108,949
Shares
repurchased (3,932,795) (46,675,075)
- ------------------------------------------------------------
Net increase 4,248,475 $ 48,433,874
- ------------------------------------------------------------
For the period
December 28, 1995
(commencement of
operations) to
August 31, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 52,471 $509,698
- ------------------------------------------------------------
Shares
repurchased (3,277) (33,397)
- ------------------------------------------------------------
Net increase 49,194 $476,301
- ------------------------------------------------------------
For the period
October 30, 1996
(commencement of
operations) to
August 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 4,052,401 $46,282,399
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,297 33,528
- ------------------------------------------------------------
4,055,698 46,315,927
Shares
repurchased (556,084) (6,437,953)
- ------------------------------------------------------------
Net increase 3,499,614 $39,877,974
- ------------------------------------------------------------
For the period
October 30, 1996
(commencement of
operations) to
August 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 443,189 $5,086,818
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 297 3,024
- ------------------------------------------------------------
443,486 5,089,842
Shares
repurchased (72,367) (846,166)
- ------------------------------------------------------------
Net increase 371,119 $4,243,676
- ------------------------------------------------------------
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.
Federal tax information
(Unaudited)
Pursuant to section 852 of the Internal Revenue Code, the fund hereby
designates $447,425 (or, if different, the amount necessary to offset
net capital gain earned by the fund) as capital gain dividends for its
taxable year ended August 31, 1997.
For the period, dividends from foreign countries were $525,013 or $.062 per
share respectively. Taxes paid to foreign countries were $36,728 or $.004
per share.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund *
International New Opportunities Fund
Investors Fund
New Opportunities Fund +
OTC & Emerging Growth Fund [DBL. DAGGER]
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Total Return Fund
High Yield Trust +
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Overseas Growth Fund
+ Closed to new investors. Some exceptions may apply. Contact Putnam
for details.
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to
maintain a price of $1.00 per share, although there is no
assurance that this price will be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
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
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
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Thomas R. Haslett
Vice President and Fund Manager
J. Peter Grant
Vice President and Fund Manager
Deborah S. Farrell
Vice President and Fund Manager
Stephen Oler
Vice President and Fund Manager
Carmel Peters
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 Markets
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. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency;
and involve risk, including the possible loss of the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
ANO04-36562 10/97