Putnam
Research
Fund
ANNUAL REPORT
July 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
Dear Shareholder:
Although Putnam Research Fund outperformed its benchmark, the Standard and
Poor's 500(registered trademark) Index, for its first fiscal year, it was
slightly behind the index for the fiscal year ended July 31, 1997. On the
other hand, the fund's 49.62% return at net asset value (41.09% at public
offering price) for fiscal 1997 is very strong on an absolute basis, and
just 3 percentage points behind the S&P 500's 52.11% for the fiscal period
just ended.
All in all, it appears that a round of applause is an appropriate way to mark
the end of your fund's second fiscal year -- and indeed, the management team
has already received one. It came in the form of a performance comparison with
All 206 capital appreciation funds tracked by Lipper Analytical Services* for
the year ended July 31, 1997, in which your fund's results soared ahead of the
33.26% average for the category. Since Lipper does not track incubated funds,
no specific ranking can be provided for the fund.
*FUND'S STRENGTH WAS BUILT ON IN-DEPTH RESEARCH YET BUOYED BY MARKET TRENDS
Over the past year, stock market indexes broke one record after another as
many equity funds struggled to keep up. As concerns about the pace of the
economy and possible interest-rate increases sparked several waves of
volatility, small- and mid-capitalization companies lost ground -- and the
market embarked on a love affair with highly liquid large-cap stocks.
While Putnam Research Fund is not specifically a large-capitalization fund,
several of the top-performing stocks in the portfolio fall into this category.
It could be said that your fund's performance over the past 12 months
reflects, to some extent, the strength of these stocks. However, it would be
far more accurate to attribute the year's results to two key factors. One is
the skill of Putnam's analysts who identified and recommended undervalued
stocks with exceptional growth potential. The other is the active management
process that weaves these recommendations into a portfolio that tracks the S&P
500 closely, even though many of the fund's holdings are not in the index.
Footnote reads:
*Lipper is an industry research firm whose rankings are based on total return
performance, vary over time, and do not reflect the effects of sales charges.
Past performance is not indicative of future results. Because of its incubated
status, the fund is not part of the Lipper capital appreciation fund universe
but its objectives are comparable with funds in this category.
With only 65 stocks in the portfolio, there is no risk of your fund's becoming
an index fund or a copy of the S&P 500. But this sector-representative
approach, which is based on a proprietary quantitative process, is an
essential part of the fund's strategy. By adapting the S&P characteristics to
a portfolio of undervalued stocks, your fund's management team seeks to
outperform the index while providing shareholders with a lower level of
volatility relative to the index.
*PORTFOLIO CAREFULLY BLENDS S&P AND NON-S&P COMPANIES
In acting on the best recommendations of Putnam's analysts, your fund's
managers will purchase stocks of companies that are part of the S&P 500 along
with others that do not meet the index's qualifying criteria. During fiscal
1997, both types made positive contributions to performance.
Computer Associates, a leader in mission-critical business software, is both
an S&P 500 and a Fortune 500 company. It develops, licenses, and supports over
500 products that enable companies to utilize the latest technologies while
making the most of existing investments in hardware, software, and staff
expertise. With 160 offices in 40 countries, Computer Associates offered
strong revenues that were at odds with its undervalued stock price when it was
added to the portfolio. As technology stocks began to recover this spring, the
position proved one of the fund's more rewarding holdings. MBNA and Xerox are
two other S&P companies that performed well for the fund this year.
[GRAPHIC OMITTED: TOP 10 HOLDINGS (7/31/97)*]
TOP 10 HOLDINGS (7/31/97)*
Intel Corp.
Semiconductors
BankAmerica Corp.
Banking
Total Corp. ADR (France)
Oil and gas
Computer Associates International, Inc.
Computer software
Sprint Corp.
Telephone services
General Electric Co.
Electronics and electrical equipment
Nabisco Holdings Corp. Class A
Food and beverages
Exxon Corp.
Oil and gas
Duke Power Co.
Electric utilities
Philip Morris Cos., Inc.
Tobacco
Footnote reads:
*These holdings represent 29.2% of the fund's net assets as of 7/31/97.
Portfolio holdings will vary over time.
As a foreign company, Ericsson, a Swedish telecommunications company, is not
included in the S&P and is held in your fund's portfolio in the form of an
American depository receipt (ADR), which is a share of a foreign security on
deposit with a United States bank.* We chose Ericsson over several U.S.-based
alternatives because we believed its management expertise and market share in
cellular telephones could deliver superior performance at a better price. The
company's recent restructuring is intended to strengthen its market
organization while intensifying its focus on research and development -- to
which it attributes much of its success. While these holdings, along with
others discussed in this report, were viewed favorably at the end of the
fiscal period, all portfolio holdings are subject to review and adjustment in
accordance with the fund's investment strategy and may vary in the future.
Footnote reads:
*To minimize risk, the fund holds no foreign securities directly. However,
although ADRs carry no currency risk, the political and economic risks of
investing in foreign securities still apply.
* FUND'S COMMITMENT TO VALUE MAY ALSO BE KEY TO RESILIENCE
As your fund begins its third fiscal year, its managers and analysts are
continuing their focus on strong companies whose stocks are undervalued,
rather than on seeking to forecast market trends. They work to keep the
portfolio fully invested in these stocks; the fund holds no bonds or
derivatives. Realistically, while this composition could make the fund quite
vulnerable in the event of a stock market decline, it is not unreasonable to
consider that in such a scenario, stocks whose prices are already low may not
suffer to the same extent as those whose valuations appear excessive. In other
words, the impact of any eventual correction may well be less for a portfolio
of undervalued stocks.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
September 17, 1997
Footnote reads:
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 7/31/97, there is no guarantee the fund will continue to hold
these securities in the future. Investments in a highly focused portfolio with
a relatively small number of holdings may be subject to greater risk than a
more broadly diversified portfolio.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of a fund's investment strategy.
Putnam Research Fund is designed for investors seeking capital
appreciation primarily through common stock investments.
TOTAL RETURN FOR PERIODS ENDED 7/31/97
Standard
& Poor's Consumer
NAV POP 500 Index Price Index
- ------------------------------------------------------------------------
1 year 49.62% 41.09% 52.11% 2.23%
- ------------------------------------------------------------------------
Life of fund
(since 10/2/95) 72.49 62.55 69.70 4.77
Annual average 34.70 30.40 33.41 2.57
- ------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/97
(most recent calendar quarter)
NAV POP
- ------------------------------------------------------------------------
1 year 33.93% 26.24%
- ------------------------------------------------------------------------
Life of fund
(since 10/2/95) 58.52 49.38
Annual average 30.31 25.94
- ------------------------------------------------------------------------
POP assumes 5.75% maximum sales charge. Performance data represent past
results and do not reflect future performance. 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. Performance data do
not take into account any adjustments for taxes payable on reinvested
distributions and reflect an expense limitation which is currently in
effect.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 10/2/95
Plot points read:
Date Fund at POP S&P 500 Index Consumer Price Index
10/2/95 9423 11170 10000
1/31/96 10641 11170 10163
7/30/96 11688 12032 10300
1/31/97 12951 13384 10444
7/31/97 16255 16970 10477
Footnote reads:
Past performance is no assurance of future results.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 7/31/97
- ------------------------------------------------------------------------
Distributions (number) 1
- ------------------------------------------------------------------------
Income $0.092
- ------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------
Long-term 0.038
- ------------------------------------------------------------------------
Short-term 0.657
- ------------------------------------------------------------------------
Total $0.787
- ------------------------------------------------------------------------
Share value: NAV POP
- ------------------------------------------------------------------------
7/31/96 $ 9.75 $10.34
- ------------------------------------------------------------------------
7/31/97 13.58 14.41
- ------------------------------------------------------------------------
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.
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 a maximum 5.75% sales charge.
COMPARATIVE BENCHMARKS
Standard & Poor's 500 Index is an unmanaged list of common stocks that is
frequently used as a general measure of stock market performance.*
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
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 Research 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 Research
Fund (the "fund") at July 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 July 31, 1997 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
September 11, 1997
Portfolio of investments owned
July 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS (99.4%) *
NUMBER OF SHARES VALUE
Aerospace (2.5%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
3,400 Boeing Co. $ 199,963
1,200 Textron, Inc. 84,075
--------------
284,038
Apparel (1.4%)
- ------------------------------------------------------------------------------------------------------------
3,100 Jones Apparel Group, Inc. + 161,006
Banks (8.3%)
- ------------------------------------------------------------------------------------------------------------
5,400 BankAmerica Corp. 407,700
1,400 Citicorp 190,050
1,350 Fifth Third Bancorp 85,303
1,200 Mercantile Bancorpation, Inc. 84,675
2,700 NationsBank Corp. 192,206
--------------
959,934
Business Services (0.9%)
- ------------------------------------------------------------------------------------------------------------
7,210 Officemax, Inc. + 100,940
Chemicals (0.8%)
- ------------------------------------------------------------------------------------------------------------
1,400 Eastman Chemical Co. 84,700
Computer Equipment (0.8%)
- ------------------------------------------------------------------------------------------------------------
1,700 Newbridge Networks Corp. (Canada) 88,613
Computer Peripherals (1.3%)
- ------------------------------------------------------------------------------------------------------------
3,000 EMC Corp. + 151,500
Computer Software (3.0%)
- ------------------------------------------------------------------------------------------------------------
5,000 Computer Associates Intl., Inc. 340,313
Computers (1.5%)
- ------------------------------------------------------------------------------------------------------------
1,600 IBM Corp. 169,200
Consumer Products (3.6%)
- ------------------------------------------------------------------------------------------------------------
2,500 Gillette Co. 247,500
4,300 Lowe's Cos., Inc. 161,788
--------------
409,288
Consumer Services (2.4%)
- ------------------------------------------------------------------------------------------------------------
11,100 CUC International, Inc. + 273,338
Electric Utilities (3.4%)
- ------------------------------------------------------------------------------------------------------------
5,700 Duke Power Co. 288,919
3,300 Pinnacle West Capital Corp. 104,156
--------------
393,075
Electronics and Electrical Equipment (5.4%)
- ------------------------------------------------------------------------------------------------------------
2,000 Applied Materials, Inc. + 183,750
4,400 General Electric Co. 308,825
1,900 Hewlett-Packard Co. 133,119
--------------
625,694
Environmental Control (1.5%)
- ------------------------------------------------------------------------------------------------------------
2,200 Browning-Ferris Industries, Inc. 81,400
2,100 USA Waste Services, Inc. + 84,656
--------------
166,056
Farm Equipment (1.2%)
- ------------------------------------------------------------------------------------------------------------
2,500 Deere (John) & Co. 142,188
Financial Services (7.5%)
- ------------------------------------------------------------------------------------------------------------
2,400 American Express Co. 201,000
1,700 Associates First Capital Corp. 112,094
1,650 Franklin Resources, Inc. 140,147
4,275 MBNA Corp. 192,375
3,100 Travelers Group, Inc. 223,006
--------------
868,622
Food and Beverages (5.6%)
- ------------------------------------------------------------------------------------------------------------
7,000 Nabisco Holdings Corp. Class A 297,500
6,900 PepsiCo, Inc. 264,356
3,100 Whitman Corp. 78,275
--------------
640,131
Gas Utilities (1.0%)
- ------------------------------------------------------------------------------------------------------------
1,700 Columbia Gas System, Inc. 116,875
Health Care Services (2.2%)
- ------------------------------------------------------------------------------------------------------------
3,600 HEALTHSOUTH Corp. + 95,400
2,700 United Healthcare Corp. 153,900
--------------
249,300
Household Products (1.0%)
- ------------------------------------------------------------------------------------------------------------
800 Clorox Co. 111,700
Insurance (2.6%)
- ------------------------------------------------------------------------------------------------------------
2,100 American General Corp. 111,825
3,300 AON Corp. 184,800
--------------
296,625
Medical Supplies and Devices (1.7%)
- ------------------------------------------------------------------------------------------------------------
2,300 Medtronic, Inc. 200,675
Metals and Mining (1.8%)
- ------------------------------------------------------------------------------------------------------------
7,700 Freeport-McMoRan Copper & Gold Co., Inc. Class A 209,825
Office Equipment (1.9%)
- ------------------------------------------------------------------------------------------------------------
2,700 Xerox Corp. 222,075
Oil and Gas (9.1%)
- ------------------------------------------------------------------------------------------------------------
1,254 British Petroleum PLC ADR (United Kingdom) 103,377
4,500 Exxon Corp. 289,125
2,600 Mobil Corp. 198,900
6,908 Total Corp. ADR (France) 348,420
1,400 Western Atlas, Inc. + 111,388
--------------
1,051,210
Pharmaceuticals and Biotechnology (5.1%)
- ------------------------------------------------------------------------------------------------------------
1,100 Bristol-Myers Squibb Co. 86,281
2,700 Merck & Co., Inc. 280,631
5,900 Pharmacia & Upjohn, Inc. 222,725
--------------
589,637
Publishing (1.4%)
- ------------------------------------------------------------------------------------------------------------
800 Gannett Co., Inc. 79,450
1,600 Tribune Co. 84,700
--------------
164,150
Railroads (0.7%)
- ------------------------------------------------------------------------------------------------------------
800 Burlington Northern Santa Fe Corp. 77,250
Retail (2.0%)
- ------------------------------------------------------------------------------------------------------------
3,600 Dayton Hudson Corp. 232,650
Semiconductors (5.4%)
- ------------------------------------------------------------------------------------------------------------
5,200 Intel Corp. 477,425
1,300 Texas Instruments, Inc. 149,500
--------------
626,925
Telecommunication Equipment (2.9%)
- ------------------------------------------------------------------------------------------------------------
800 Northern Telecom Ltd. (Canada) 83,650
3,900 Panamsat Corp. + 119,681
2,200 Tellabs, Inc.+ 131,725
--------------
335,056
Telephone Services (2.7%)
- ------------------------------------------------------------------------------------------------------------
6,300 Sprint Corp. 311,850
Telephone Utilities (2.8%)
- ------------------------------------------------------------------------------------------------------------
3,800 Ericsson (L. M.) Telephone Co. ADR Class B
(Sweden) 171,950
2,500 SBC Communications, Inc. 147,969
--------------
319,919
Tobacco (3.2%)
- ------------------------------------------------------------------------------------------------------------
6,400 Philip Morris Cos., Inc. 288,800
2,500 RJR Nabisco Holdings Corp. 82,031
--------------
370,831
Wireless Communications (0.8%)
- ------------------------------------------------------------------------------------------------------------
2,700 Airtouch Communications, Inc. + 88,931
--------------
Total Common Stocks (cost $8,749,737) $ 11,434,120
SHORT-TERM INVESTMENTS (0.9%)*(cost $106,017)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 106,000 Interest in $204,956,000 joint repurchase agreement
dated July 31, 1997 with UBS Securities due
August 1, 1997 with respect to various U.S. Treasury
obligations -- maturity value of $106,017 for an
effective yield of 5.76% $ 106,017
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $8,855,754) *** $ 11,540,137
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $11,508,736.
*** The aggregate identified cost on a tax basis is $8,892,903,
resulting in gross unrealized appreciation and depreciation of
$2,692,605 and $45,371, respectively, or net unrealized appreciation
of $2,647,234.
+ Non-income-producing security.
ADR after the name of a foreign holding stands for American
Depository Receipts representing ownership of foreign securities on
deposit with a domestic custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
July 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $8,855,754) (Note 1) $11,540,137
- ---------------------------------------------------------------------------------------------------
Cash 696
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 15,858
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,605
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 7,147
- ---------------------------------------------------------------------------------------------------
Total assets 11,565,443
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 22,420
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 1,825
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,044
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 8
- ---------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 8,843
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 22,567
- ---------------------------------------------------------------------------------------------------
Total liabilities 56,707
- ---------------------------------------------------------------------------------------------------
Net assets $11,508,736
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $ 7,882,019
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 40,752
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 901,582
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,684,383
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $11,508,736
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
($11,508,736 divided by 847,428 shares) $13.58
- ---------------------------------------------------------------------------------------------------
Offering price per share (100/94.25 of $13.58)* $14.41
- ---------------------------------------------------------------------------------------------------
* On single sales of less than $50,000. On sales of $50,000 or more and on group sales the offering
price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended July 31, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $834) $146,319
- --------------------------------------------------------------------------------------------------
Interest 1,530
- --------------------------------------------------------------------------------------------------
Total investment income 147,849
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 54,610
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 14,835
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,716
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 60
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 232
- --------------------------------------------------------------------------------------------------
Reports to shareholders 4,818
- --------------------------------------------------------------------------------------------------
Auditing 16,559
- --------------------------------------------------------------------------------------------------
Legal 5,558
- --------------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (14,975)
- --------------------------------------------------------------------------------------------------
Total expenses 84,413
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (5,518)
- --------------------------------------------------------------------------------------------------
Net expenses 78,895
- --------------------------------------------------------------------------------------------------
Net investment income 68,954
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,095,630
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 2,383,859
- --------------------------------------------------------------------------------------------------
Net gain on investments 3,479,489
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $3,548,443
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
For the period
October 2, 1995
(commencement
Year ended of operations) to
July 31 July 31
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $68,954 $45,467
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,095,630 240,380
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,383,859 300,524
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,548,443 586,371
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (57,507) (17,804)
From net realized gain on investments (434,428) --
Increase from capital share transactions (Note 4) 1,833,147 4,050,514
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 4,889,655 4,619,081
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 6,619,081 2,000,000
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $40,752 and $29,103, respectively $11,508,736 $6,619,081
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ----------------------------------------------------------------------------------------------------------------------------------
Year For the period
Per-share ended Oct. 2, 1995+
operating performance July 31 to July 31
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $9.75 $8.50
- ----------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income .10(d) .09(a)(d)
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 4.52 1.21
- ----------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 4.62 1.30
- ----------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.09) (.05)
- ----------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.70) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (.79) (.05)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.58 $9.75
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(b) 49.62 15.28*
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $11,509 $6,619
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.00(d) .86*(d)
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .82(d) .92*(d)
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 119.20 80.74*
- ----------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid $.0233 $.0284
- ----------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average
number of shares outstanding during the period.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation,
expenses of the fund for the period ending July 31, 1997, and July 31, 1996, reflect a reduction
of $0.02 and $0.05 per share respectively.
</TABLE>
Notes to financial statements
July 31, 1997
Note 1
Significant accounting policies
Putnam Research Fund ("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.
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 the case of some
securities traded over-the-counter -- the last reported bid price. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost, which approximates market value.
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) 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.
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital
gain distributions, if any, are recorded on the ex-dividend date and paid 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 and organization expenses.
Reclassifications are made to the fund's capital accounts to reflect income
and gains available for distribution (or available capital
loss carryovers) under income tax regulations. For the year ended
July 31, 1997, the fund reclassified $202 to increase undistributed
net investment income and $202 to decrease paid-in-capital. The calculation
of net investment income per share in the financial highlights table excludes
these adjustments.
G) Expenses of the trust Expenses directly charged or attributable to any fund
will be paid from the assets of that fund. Generally, expenses of the trust
will be allocated among and charged to the assets of each fund on a basis that
the Trustees deem fair and equitable, which may be based on the relative
assets of each fund or the nature of the services performed and relative
applicability to each fund.
H) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public offering of
its shares were $8,843. These expenses are being amortized on projected net
asset levels over a five-year period. The fund will reimburse Putnam
Management for the payment of these expenses.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.65% of the first $500 million of
average net assets, 0.55% of the next $500 million, 0.50% of the next $500
million, 0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405%
of the next $5 billion, 0.39% of the next $5 billion, and 0.38% of any excess
thereafter. Effective April 1, 1997, the base fee is subject to a performance
adjustment based on the investment performance of the fund compared to changes
in the value of the Standard & Poor's 500 composite Stock Price Index.
Performance will be calculated for these purposes at the beginning of each
fiscal quarter, for the thirty-six month period immediately preceding such
quarter or the life of the fund, if shorter. The applicable base fee will be
increased or decreased for each calendar quarter by an incentive payment or
penalty at the annual rate of 0.01% of the fund's average net assets for each
1% increment by which the fund outperforms or underperforms the S&P 500 in
excess of 3%, subject to a maximum increase or decrease of 0.07% of average
net assets. There was no such adjustment as of July 31, 1997.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) from October 2, 1995 (commencement of
operations) through December 31, 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 1.00% of the fund's
average net assets.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (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 July 31, 1997, fund expenses were reduced by $5,518 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 $108 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 "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 certain Putnam funds
until distribution in accordance with the 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 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 year ended July 31, 1997, Putnam Mutual Funds Corp., acting as the
underwriter, received no net commissions from the sales of shares of the fund.
Note 3
Purchase and sales of securities
During the year ended July 31, 1997, purchases and sales of investment
securities other than short-term investments aggregated $11,238,239 and
$9,833,473, 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 July 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
July 31, 1997
- ------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------
Shares sold 372,818 $4,217,387
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 46,401 491,935
- ------------------------------------------------------------
419,219 4,709,322
Shares
repurchased (250,784) (2,876,175)
- ------------------------------------------------------------
Net increase 168,435 $1,833,147
- ------------------------------------------------------------
For the period
October 2, 1995
(commencement of
operations) to
July 31, 1996
- ------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------
Shares sold 548,532 $5,054,069
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,989 17,804
- ------------------------------------------------------------
550,521 5,071,873
Shares
repurchased (106,822) (1,021,359)
- ------------------------------------------------------------
Net increase 443,699 $4,050,514
- ------------------------------------------------------------
At July 31, 1997, Putnam Investments, Inc. owned 646,388 shares of the fund
(76.3% of shares outstanding), valued at $8,777,949.
Federal tax information
(Unaudited)
The fund has designated 25.81% of the distributions from net investment
income as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $0.038 per share (or if different, the amount necessary
to offset net capital gain earned by the Fund) as capital gain dividends
for its taxable year ended July 31, 1997.
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. Bogan
Vice President and Fund Manager
Patrick O'Donnell
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 Research 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.
35889-2AQ 9/97
