Putnam
Emerging
Markets
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
8-31-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "These (developing) countries account for well over half of world
output. Provided they continue to expand and also remain open to world
trade, struggling emerging countries should be able, in time, to trade
their way out of the crisis."
-- Financial Times, September 9, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
19 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
No one argues the point that over the past year or so the stock markets of
developing countries were not the places for investors seeking profits. At
the same time, these emerging countries represent excellent potential for
investors with stamina, courage, and relatively long-term horizons.
Thus as Putnam Emerging Markets Fund's managers review fund performance
during the 12 months ended August 31, 1998, they will be comparing the
relative merits of these financially troubled countries rather than
discussing results in absolute terms. That is a reasonable approach, for
what we are dealing with here is a situation that can hardly do anything
but improve over time. Experience has taught us that while it may not
always be so, today's troubled markets can be tomorrow's leaders.
In the following report, your fund's managers provide the rationale behind
their fiscal '98 strategies and offer their view of what lies ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
October 21, 1998
Report from the Fund Managers
Thomas R. Haslett
J. Peter Grant
Deborah Farrell
Stephen Oler
Carmel Peters
The 12 months ended August 31, 1998, demonstrated both the risks and the
benefits of investing in emerging markets. The crisis that started in Asia
during the summer of 1997 has continued to afflict emerging markets (as
well as developed ones) in all regions of the globe and real economic
recovery has barely begun. The immediate fallout from Asia -- above all,
cheaper commodity prices and slowing rates of growth -- has had a real
impact on company earnings and a psychological impact on investor
sentiment. However, as was seen in January of this year, when several
markets in Southeast Asia gained 25% in one day, sentiment can change
quickly and fulfill much of the positive potential of emerging-markets
investments.
Reflecting the prevailing unfavorable environment, Putnam Emerging Markets
Fund's class A shares posted a -45.69% return at net asset value
(-48.83% at public offering price) for its fiscal year, which ended August
31, 1998. This result is somewhat more favorable than the return of its
benchmark index, the Morgan Stanley Capital International Emerging Markets
Free Index, which posted a -49.56% decline. For complete performance
information, including returns for other share classes and over longer
periods, please turn to page 9.
* INVESTMENT STRATEGY BASED ON RIGOROUS ANALYSIS
Your fund's strategy is to take advantage of the most attractive capital
growth opportunities in the world's emerging markets. With large
populations and relatively new capitalist policies, these countries have
the potential for economic growth rates far greater than those of
developed, industrial countries. We analyze and invest in every region
that offers these opportunities -- Asia, Latin America, the Middle East,
Africa, and the emerging capitalist economies of Europe. To decide which
countries offer the best combination of rewards and risks, we employ both
a top-down analysis of each country's investment conditions and a
bottom-up analysis of each stock's within each country.
Our investment team analyzes countries using economic and technical data
to track business conditions and investors' willingness to buy securities.
Analysts and portfolio managers reconcile all the quantitative information
while also drawing on their years of experience in and knowledge of each
market.
Analyzing investment conditions in each country is essential but
ultimately, the fund owns securities, not countries. So as part of our
stock selection process the team visits companies and analyzes their
financial records to find stocks that we believe are priced below the
economic value of their businesses. We also strive to find companies that
are uniquely positioned within their markets and industries. Above all, we
try to select companies with strong balance sheets and time-tested
management.
* FUND FOCUSES ON LATIN AMERICA
During the past year the results of our top-down analysis steered us away
from Asian markets that were mired in recession and toward Latin American
and European markets, where economic growth was relatively stronger.
Within Latin America, the fund has favored Brazil, Mexico, and Argentina,
relatively large and diverse markets that offer many attractive companies.
During the fiscal year we maintained smaller exposures to countries such
as Venezuela and Chile, where dependency on oil and other commodity
exports that have fallen in value has weakened economic conditions.
[GRAPHIC OMITTED: horizontal bar chart of COUNTRY ALLOCATIONS]
COUNTRY ALLOCATIONS
Brazil 15.7%
Mexico 11.4%
India 7.3%
Taiwan 6.5%
Israel 6.0%
Footnote reads:
*Based on net assets as of 8/31/98. Holdings will vary over time.
Although all Latin American markets are down sharply for the fiscal
period, we are confident in the region's leaders. Since several of the
countries raised interest rates to protect their currencies, we avoided
companies more sensitive to the economic cycle. In Brazil, for example, we
have had positions in banks such as Banco Bradesco and Banco Itau, which
have high cash balances and are known for conservative business practices.
We also added to the fund's position in Telebras as the nation privatized
additional parts of this large telecommunications company. International
companies bid strongly for the 12 Telebras units offered in the
privatization. Although these holdings, as well as others discussed in
this report, were viewed favorably at the end of the fiscal period, all
are subject to review and adjustment in accordance with the fund's
investment strategy and may vary in the future.
* ASIAN RECESSION CRIMPS BUSINESS PROFITS
A year has passed since currency devaluation in Thailand ignited the Asian
financial crisis, and some of Asia's economies have at least stabilized
their financial situations during this time. The difficulties they now
face are economic recession and the low levels of the Japanese yen. Japan,
the region's largest developed economy, is stuck in recession and is
hampered by political disagreements about how to resolve the problem of
bad bank loans and the deflationary forces at work in this economy. The
economic weakness limits Japanese imports from Asian emerging markets. The
weak yen also keeps alive the pressure on China and Hong Kong to devalue
their currencies, something that could further harm the region.
During the fiscal period, we limited the fund's exposure to Asia. Within
the region, we preferred companies in India, Taiwan, South Korea, and the
Philippines; our analysis shows that many companies in these markets have
maintained their competitive standings. We have concentrated on
high-quality companies in the manufacturing and utility sectors that are
less sensitive to negative domestic economic growth rates and real estate
prices.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Telebras Co. ADR (Brazil)
Utilities
Cia Cervejaria Brahma ADR (Brazil)
Food and beverages
Yapi ve Kredi Bankasi A.S. GDR (Turkey)
Insurance and finance
YPF S.A. ADR (Argentina)
Oil and gas
Bank of Greece, S.A. (Greece)
Insurance and finance
Telefonos de Mexico S.A. ADR (Mexico)
Utilities
Investec Consultadoria International S.A. (Portugal)
Insurance and finance
Companhia Energetica de Minas Gerais ADR (Brazil)
Utilities
Enersis S.A. ADR (Chile)
Utilities
Bank Leumi Le-Israel (Israel)
Insurance and finance
Footnote reads:
These holdings represent 19.7% of the fund's net assets as of 8/31/98.
Portfolio holdings will vary over time.
* EMERGING EUROPE AND MIDDLE EAST HOLD UP RELATIVELY WELL DESPITE RUSSIAN
WOES
Emerging European markets have provided some refuge in the past year. The
expanding economies of developed Europe are stimulating growth in their
neighbors and international enthusiasm for the 1999 introduction of the
euro has provided an extra boost. Markets in the Middle East have been
less volatile because fewer emerging markets funds have had large
positions there, and economic conditions have remained solid.
Of the stocks the fund owns in emerging Europe and the Middle East, we are
pleased with the performance of technology stocks in Israel, bank holdings
in Poland, and utility companies in Portugal. Although we reduced the
fund's Russian holdings prior to that nation's crisis this summer, the
fund did not completely escape the deterioration of that market. The
Russian situation has not had a major impact on other European emerging
economies.
* EMERGING-MARKETS FUNDAMENTALS ARE MORE POSITIVE THAN SENTIMENT INDICATES
Although we have few positive results to report, we are nonetheless
optimistic that our investment process continues to position the fund well
for a future recovery. Our analysis also convinces us that the economic
and business fundamentals in most of the markets in which the fund is
invested are better than many investors recognize. While we anticipate a
long road to full recovery for Asia and volatility for the foreseeable
future, we are confident that a shift in global sentiment could have a
positive effect. We will continue to seek well-managed companies with
strong balance sheets in emerging markets, the type of companies likely to
benefit when sentiment changes.
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 8/31/98, there is no guarantee the fund will
continue to hold these securities in the future.
International investing involves certain risks, such as currency
fluctuations, economic instability, and political developments not present
with domestic investments. 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 8/31/98
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 -45.69% -48.83% -45.99% -48.63% -45.91% -47.78%
- --------------------------------------------------------------------------
Life of fund -29.18 -33.27 -30.45 -32.46 -30.12 -32.57
Annual average -12.12 -14.06 -12.72 -13.67 -12.56 -13.72
- --------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 8/31/98
MSCI MSCI
Emerging Markets Emerging Markets Consumer
Index Free Index* Price Index
- --------------------------------------------------------------------------
1 year -50.27% -49.56% 1.62%
- --------------------------------------------------------------------------
Life of fund -43.98 -44.22 6.45
Annual average -19.53 -19.66 2.37
- --------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
5.75% and 3.50% respectively. Class B share returns for the 1-year and
life-of-fund periods reflect the applicable contingent deferred sales
charge (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
expenses applicable to such shares. All returns assume reinvestment of
distributions at NAV. 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.
*Putnam Management has recently undertaken a review of benchmarks for
various funds. This index replaces the MSCI Emerging Markets Index as a
performance benchmark for this fund because, in Putnam Management's
opinion, the securities tracked by this index more accurately reflect the
types of securities generally held by the fund.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 8/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 1 1 1
- ------------------------------------------------------------------------------
Income -- -- --
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term $0.052 $0.052 $0.052
- ------------------------------------------------------------------------------
Short-term 0.151 0.151 0.151
- ------------------------------------------------------------------------------
Total $0.203 $0.203 $0.203
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
8/31/97 $10.94 $11.61 $10.87 $10.89 $11.28
- ------------------------------------------------------------------------------
8/31/98 5.81 6.16 5.74 5.76 5.97
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(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 -46.71% -49.78% -47.09% -49.68% -46.92% -48.78%
- ------------------------------------------------------------------------------
Life of fund -26.26 -30.51 -27.66 -29.75 -27.21 -29.76
Annual average -10.45 -12.36 -11.07 -12.01 -10.87 -12.01
- ------------------------------------------------------------------------------
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.
The performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
[GRAPHIC OMMITTED: worm chart 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 Consumer Price
Date shares at POP Markets Free Index Index
12/95 9,424 10,000 10,000
12/96 11,626 10,603 10,332
12/97 10,809 9,374 10,508
8/98 $6,673 $5,578 $10,645
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 $6,955 ($6,754 with a contingent deferred sales charge); a
$10,000 investment in the fund's class M shares would have been valued at
$6,988 ($6,743 at public offering price). 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 5.75% maximum 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
The Morgan Stanley Capital International (MSCI) Emerging Markets Index is
an index of approximately 1,011 securities representing 26 emerging
markets, with all values expressed in U.S. dollars. A securities index
assumes reinvestment of all distributions and interest payments and does
not take into account brokerage fees or taxes. Securities in the fund do
not match those in the index and performance of the fund will differ. It
is not possible to invest directly in an index.
The Morgan Stanley Capital International Emerging Markets Free Index is an
index of approximately 1,003 securities available to non-domestic
investors representing 26 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.
Report of independent accountants
For the fiscal year ended August 31, 1998
To the Trustees of Putnam Investment Funds and Shareholders of Putnam
Emerging Markets Fund (a series of Putnam Investment Funds)
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") at August 31, 1998, 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, 1998 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 13, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
August 31, 1998
COMMON STOCKS (90.4%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Argentina (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,871 Inversiones Y Representaciones S.A. GDR $ 44,436
75,000 Perez Companc S.A. Class B 297,059
26,400 Telefonica de Argentina S.A. ADR 590,700
58,000 Transportadora de Gas del Sur ADR 551,000
42,100 YPF S.A. ADR 931,463
--------------
2,414,658
Brazil (15.7%)
- --------------------------------------------------------------------------------------------------------------------------
1 Banco Bradesco S.A. BRC 5
1,250 Banco Itau S.A. BRC $6.86 No par value (NPV) pfd. 541,723
20,500 Brazil Realty S.A. 144A GDR 328,000
4,300 Centrais Eletricas de Santa Catarina (CELESC)
144A GDR 184,900
112,800 Cia Cervejaria Brahma ADR 1,043,400
32,200 Companhia Brasileira de Distribuicao Grupo
Pao de Acucar ADR 434,700
1,300 Companhia Cimento Portland Itau 176,739
49,807 Companhia Energetica de Minas Gerais ADR 884,074
6,600 Companhia Paulista de Forca e Luz CPFL 549,682
19,000 Empresa Bras Aeronautica (NON) 258,328
49,900 Gerdau S.A. 487,636
72,900 Petroleo Brasileiro S.A.-Petrobras ADR 729,000
48,700 Souza Cruz S.A. 297,961
32,900 Telebras Co. ADR 2,325,619
345 Telecomunicacoes Sao Paulo S.A. 51,304
--------------
8,293,071
Canada (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
38,800 Hurricane Hydrocarbons Ltd. (NON) 67,898
Czech Republic (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
33,000 Ceske Radiokomunikace 144A GDR (NON) 693,000
Chile (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
26,700 Cia de Telecomunicationes de Chile S.A. ADR 408,844
42,800 Distribucion y Servicio D&S S.A. ADR (NON) 390,550
44,500 Enersis S.A. ADR 806,563
40,000 Madeco S. A. ADR 192,500
--------------
1,798,457
Egypt (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
36,500 EFG-Hermes Holdings, S.A.E. 144A GDR (NON) 419,750
Greece (5.8%)
- --------------------------------------------------------------------------------------------------------------------------
9,466 Commercial Bank of Greece, S.A. 680,626
26,188 Hellenic Telecommunication Organization S.A. 606,491
40,588 Hellenic Telecommunication Organization S.A. GDR 446,468
6,690 National Bank of Greece, S.A. 898,157
14,600 STET Hellas Telecommunications S.A. ADR (NON) 427,050
--------------
3,058,792
Hong Kong (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
210,000 Asia Satellite Telecommunications Holdings Ltd. 220,901
110,000 Cheung Kong Infrastructure Holdings 191,667
150,000 China Telecom Ltd. (NON) 197,475
200,000 Guangdong Kelon Elec Holding 100,674
108,000 Johnson Electric Holdings Ltd. 182,607
93,000 Smartone Telecommunications 144A 195,656
46,000 VTech Holdings, Ltd. 161,491
--------------
1,250,471
Hungary (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
25,900 MOL Magyar Olaj-es Gazipari Rt. 144A GDR 499,870
68,250 Pick Szeged Rt. 144A GDR 476,044
--------------
975,914
India (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
16,000 Bajaj Auto Ltd. SPONS GDR 252,800
44,000 Bharat Heavy Electricals Ltd. (BHEL) 238,576
27,400 BSES Ltd. GDR 294,550
50,000 Gujarat Ambuja Cements Ltd. 144A GDR 175,000
15,000 Hindustan Lever Ltd. 572,760
30,000 Hindustan Petroleum Corp. Ltd. 198,042
9,200 Housing Development Finance Corporation Ltd. 555,635
30,000 Indian Hotels, Co. Ltd. GDR 198,750
25,500 Larsen & Toubro Ltd. 200,813
40,000 Larsen & Toubro Ltd. GDR 163,585
92,000 Mahanagar Telephone Nigam Ltd. 435,698
4,600 Ranbaxy Laboratories GDR Ltd. 59,570
20,000 Ranbaxy Laboratories Ltd. 239,741
200 Telco (Tata Engineering and Locomotive Co., Ltd.) 610
34,000 Videsh Sanchar Nigam Ltd. GDR 297,500
--------------
3,883,630
Israel (6.0%)
- --------------------------------------------------------------------------------------------------------------------------
494,000 Bank Leumi Le-Israel 793,716
9,600 Formula Systems Ltd. (NON) 258,683
4,100 Koor Industries Ltd. 395,034
20,750 Koor Industries Ltd. ADR 370,906
204,800 Supersol Ltd. 565,410
18,000 Supersol Ltd. ADR 231,750
16,100 Tadiran Ltd. 537,391
--------------
3,152,890
Malaysia (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
194,000 Berjaya Sports Toto Berhad 126,224
1,050,000 IJM Copr. Berhad 170,793
148,000 Jaya Tiasa Holdings Brehad 95,941
105,000 Malakoff Berhard 82,885
14,000 MNI Holdings Berhad 6,195
715,000 PPB Oil Palms Berhad 302,727
--------------
784,765
Mexico (11.4%)
- --------------------------------------------------------------------------------------------------------------------------
266,000 Alfa S.A. de C.V. Class A 600,000
6,990 Cemex S. A. de C.V. CPO 14,015
233,000 Cemex S. A. de C.V. Class B 572,281
500,000 Cifra S.A. de C.V. (NON) 541,353
35,400 Coca-Cola Femsa S.A. ADR 384,975
385,300 Corporacion Moctezuma, S.A. de C.V. (NON) 251,073
273,000 Fomento Economico Mexicano, S.A. de C.V. 459,789
40,500 Grupo Accion, S.A. de C.V. 144A ADR (NON) 141,750
50,200 Grupo Imsa S.A. de C.V. ADR (NON) 351,400
35,900 Grupo Televisa S.A.GDR (NON) 619,275
235,000 Kimberly-Clark de Mexico, S.A. de C.V. Class A 515,940
42,400 Panamerican Beverages, Inc. Class A 675,750
25,000 Telefonos de Mexico S.A. ADR Class L 892,188
--------------
6,019,789
Peru (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
27,800 Telefonica del Peru S.A. ADR 357,925
Philippines (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,223,400 Ayala Land, Inc. 193,611
1,520,000 Cosmos Bottling Corp. 87,156
2,057,000 Cosmos Bottling Corp.144A 117,947
4,162,950 International Container Terminal Services, Inc. (NON) 150,859
34,700 Manila Electric Co. Class B 57,303
7,400 Philippine Long Distance Telephone Co. 115,625
8,100 Philippine Long Distance Telephone Co. ADR 134,690
1,580,000 SM Prime Holdings Inc. (NON) 192,064
--------------
1,049,255
Poland (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
33,000 @Entertainment, Inc. (NON) 288,750
33,100 Kredyt Bank S.A. GDR 492,363
--------------
781,113
Portugal (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
22,800 Investec Consultadoria International S.A. (NON) 885,879
13,000 Portugal Telecom S.A. 595,304
--------------
1,481,183
Russia (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
4,256,000 Unified Energy Systems GDR (NON) 117,040
South Africa (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
20,500 Energy Africa Ltd. 144A (NON) 215,250
200,000 Engen Ltd. 597,316
239,625 FirstRand Limited 215,627
39,843 Liberty Life Association of Africa Ltd. 466,705
106,500 Sasol Ltd. 446,125
--------------
1,941,023
South Korea (3.2%)
- --------------------------------------------------------------------------------------------------------------------------
55,000 Korea Electric Power Corp. 709,941
7,860 Pohang Iron & Steel Company, Ltd. 303,584
14,991 Samsung Electronics Co. 499,329
1,100 Samsung Fire & Marine Insurance 204,006
--------------
1,716,860
Taiwan (6.5%)
- --------------------------------------------------------------------------------------------------------------------------
247,812 Acer, Inc. (NON) 219,850
12,800 Ase Test Limited (NON) 332,800
48,000 Asustek Computer Inc. (NON) 347,287
637,023 Bank Sinopac (NON) 267,027
90,360 Delta Electronics, Inc. 259,432
81,200 Hon Hai Precision Industry (NON) 382,337
600,000 Pacific Electrical Wire & Cable 420,327
150,792 President Chain Store Corp. 398,302
31,400 Siliconware Precision Industries Co. GDR (NON) 235,500
336,550 Taiwan Semiconductor Manufacturing Co. (NON) 594,253
--------------
3,457,115
Thailand (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
65,300 Advanced Info Service Public Co. Ltd. 265,701
123,000 Electricity Generating Public Co. Ltd. (NON) 170,752
212,700 International Broadcasting Corporation
Public Company Ltd. 77,637
19,800 PTT Exploration and Production PLC (NON) 130,799
16,000 PTT Exploration and Production PLC 144A (NON) 105,697
--------------
750,586
Turkey (4.7%)
- --------------------------------------------------------------------------------------------------------------------------
102,000 Haci Omer Sabanci Holdings ADR 400,350
48,000 Haci Omer Sabanci Holding AS ADR Rights (NON) 168,000
692,300 Migros Turk (NON) 574,817
3,995,749 Turkiye Is Bankasi (Isbank) Class C 116,840
3,255,200 Vestel Elektronik Sanayi ve Ticaret A.S. (NON) 273,217
52,345 Yapi ve Kredi Bankasi A.S. GDR 968,383
--------------
2,501,607
United Kingdom (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Benpres Holdings Corp. GDR (NON) 82,500
24,000 Benpres Holdings Corp. 144A GDR (NON) 33,000
179,000 Billiton PLC 291,599
57,700 Coca-Cola Beverages PLC 144A 148,593
67,550 Lonrho PLC 259,904
67,550 Lonrho Africa PLC 57,641
--------------
873,237
Venezuela (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
13,500 Siderurgica Venezolana 47,250
--------------
Total Common Stocks (cost $74,168,885) $ 47,887,279
FOREIGN GOVERNMENT BONDS AND NOTES (0.6%) (a) (cost $795,625)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,340,000 Russia (Government of) 144A bonds 12 3/4s, 2028 $ 308,200
SHORT-TERM INVESTMENTS (3.8%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 510,000 Corporate Receivables Corp. effective yield
of 5.53%, September 11, 1998 $ 509,217
202,000 Ford Motor Credit Corp. effective yield of
5.51%, October 7, 1998 200,887
473,000 Windmill Funding effective yield of 5.5%,
October 28, 1998 468,844
828,000 Interest in $750,000,000 joint tri-party repurchase
agreement dated August 31, 1998 with
Goldman, Sachs & Co. due September 1, 1998
with respect to various U.S. Treasury
obligations -- maturity value of $828,133 for
an effective yield of 5.78% 828,133
--------------
Total Short-Term Investments (cost $2,007,081) $ 2,007,081
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $76,971,591) (b) $ 50,202,560
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $52,954,293.
(b) The aggregate identified cost on a tax basis is $77,953,522, resulting in gross unrealized appreciation and
depreciation of $838,787 and $28,589,749, respectively, or net unrealized depreciation of $27,750,962.
(NON) 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 and 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 greater than 10% at August 31, 1998 (as a percentage
of net assets):
Insurance and Finance 15.3%
Utilities 15.0
Telecommunications 11.1
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at August 31, 1998
(aggregate face value $1,845,765)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Malaysian Ringgit $686,036 $685,810 2/3/99 $(226)
Phillippine Peso 1,107,433 1,159,955 2/3/99 52,522
- -------------------------------------------------------------------------------
$52,296
- -------------------------------------------------------------------------------
Swap Contracts Outstanding at August 31, 1998
Unrealized
Notional Termination Appreciation/
Amount Date (Depreciation)
- -------------------------------------------------------------------------------
Agreement with Lehman Brothers Finance
S.A. Dated May 15, 1998 to receive
(pay) quarterly the notional amount
multiplied by the return on the Korea
Stock Price Index and to pay the notional
amount multiplied by three month
LIBOR adjusted by a specified spread $407,213 Dec-98 $9,324
Agreement with Lehman Brothers Finance
S.A. Dated July 16, 1998 to receive
(pay) quarterly the notional amount
multiplied by the return on the Korea
Stock Price Index and to pay the notional
amount multiplied by three month
LIBOR adjusted by a specified spread 200,000 Jul-99 (21,949)
Agreement with Salomon Brothers
International Ltd. Dated April 13,
1998 to receive (pay) quarterly the
notional amount multiplied by the return
of SK Telecom Co. Limited (South Korea)
and pay the notional amount multiplied by
three month LIBOR adjusted by a
specified spread. 417,782 Apr-00 (20,364)
- -------------------------------------------------------------------------------
$(32,989)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
August 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $76,971,591) (Note 1) $ 50,202,560
- -----------------------------------------------------------------------------------------------
Cash 101
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $1,436,986) 1,419,869
- -----------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 289,349
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 216,710
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 2,956,844
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 52,522
- -----------------------------------------------------------------------------------------------
Receivable for open swap contract (Note 1) 9,324
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 3,491
- -----------------------------------------------------------------------------------------------
Total assets 55,150,770
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 1,456,273
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 322,161
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 183,925
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 72,730
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,351
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 811
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 43,664
- -----------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 3,662
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 226
- -----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 3,787
- -----------------------------------------------------------------------------------------------
Payable for open swap contracts (Note 1) 42,313
- -----------------------------------------------------------------------------------------------
Other accrued expenses 63,574
- -----------------------------------------------------------------------------------------------
Total liabilities 2,196,477
- -----------------------------------------------------------------------------------------------
Net assets $ 52,954,293
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $102,764,363
- -----------------------------------------------------------------------------------------------
Accumulated net investment loss (Note 1) (133,970)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investment
income and foreign currency transactions (Note 1) (22,926,427)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
and assets and liabilities in foreign currencies (26,749,673)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $ 52,954,293
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($29,239,131 divided by 5,028,312 shares) $5.81
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $5.81)* $6.16
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($21,722,378 divided by 3,784,533 shares)** $5.74
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,992,784 divided by 345,739 shares) $5.76
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.5 of $5.76)* $5.97
- -----------------------------------------------------------------------------------------------
* 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, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $99,278) $ 1,539,430
- -----------------------------------------------------------------------------------------------
Interest 251,828
- -----------------------------------------------------------------------------------------------
Total investment income 1,791,258
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,027,357
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 558,186
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 15,715
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,025
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 115,854
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 356,561
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 26,682
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 129
- -----------------------------------------------------------------------------------------------
Reports to shareholders 41,585
- -----------------------------------------------------------------------------------------------
Registration fees 2,568
- -----------------------------------------------------------------------------------------------
Auditing 53,875
- -----------------------------------------------------------------------------------------------
Legal 4,398
- -----------------------------------------------------------------------------------------------
Postage 31,048
- -----------------------------------------------------------------------------------------------
Other 12,059
- -----------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (169,016)
- -----------------------------------------------------------------------------------------------
Total expenses 2,083,026
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (45,332)
- -----------------------------------------------------------------------------------------------
Net expenses 2,037,694
- -----------------------------------------------------------------------------------------------
Net investment loss (246,436)
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (21,879,703)
- -----------------------------------------------------------------------------------------------
Net realized loss on forward currency transactions (Note 1) (154,783)
- -----------------------------------------------------------------------------------------------
Net realized loss on swap contracts (Note 1) (323,261)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 80,448
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures contracts and
swap contracts during the year (22,289,194)
- -----------------------------------------------------------------------------------------------
Net loss on investments (44,566,493)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(44,812,929)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended August 31
---------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment loss $ (246,436) $ (218,701)
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions (22,357,747) 1,432,850
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (22,208,746) (4,883,449)
- ---------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (44,812,929) (3,669,300)
- ---------------------------------------------------------------------------------------------------------------
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 (927,370) (90,004)
- ---------------------------------------------------------------------------------------------------------------
Class B (762,785) (34,401)
- ---------------------------------------------------------------------------------------------------------------
Class M (76,991) (3,163)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 7,866,413 92,555,524
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (38,713,662) 88,743,181
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 91,667,955 2,924,774
- ---------------------------------------------------------------------------------------------------------------
End of year (including accumulated net investment
loss and distributions in excess of net investment
income of $133,970 and $104,516, respectively) $ 52,954,293 $91,667,955
- ---------------------------------------------------------------------------------------------------------------
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
Per-share Dec. 28, 1995+
operating performance Year ended August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $10.94 $10.28 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (c)(d) .01 (.02) .01
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (4.94) .81 1.77
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (4.93) .79 1.78
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.20) (.12) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.13) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $5.81 $10.94 $10.28
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (45.69) 7.82 20.94*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $29,239 $49,581 $2,925
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 2.10 2.10 1.25*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%)(c) .06 (.23) .11*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 112.35 141.81 45.90*
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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. Expenses for the period ended August 31, 1998
reflect a reduction of $.02, $.02 and $.02 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
Per-share Year ended Oct. 30, 1996+
operating performance August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $10.87 $9.95
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (c)(d) (.07) (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (4.86) 1.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (4.93) 1.05
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.20) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $5.74 $10.87
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (45.99) 10.67*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $21,722 $38,044
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 2.85 2.39*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%)(c) (.72) (.76)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 112.35 141.81
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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. Expenses for the period ended August 31, 1998
reflect a reduction of $.02, $.02 and $.02 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
Per-share Year ended Oct. 30, 1996+
operating performance August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $10.89 $9.95
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (c)(d) (.05) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (4.88) 1.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (4.93) 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.20) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $5.76 $10.89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (45.91) 10.88*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,993 $4,043
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) (c) 2.60 2.18*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) (c) (.43) (.53)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 112.35 141.81
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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. Expenses for the period ended August 31, 1998
reflect a reduction of $.02, $.02 and $.02 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, 1998
Note 1
Significant accounting policies
Putnam Emerging Markets 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-ended management
investment company. The objective of the fund is to seek long-term capital
appreciation by investing primarily in common stocks and other equity
securities of emerging market companies.
The fund offers class A, class B and class M shares. 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 the case of
some securities traded over-the-counter -- the last reported bid price.
Investments for which market quotations are not readily available (and in
certain circumstances debt securities which trade on an exchange) are
stated at fair value on the basis of valuations furnished by pricing
services approved by the Trustees, 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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. 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 gains and losses 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) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Swap contracts The fund may engage in swap agreements, which are
agreements to exchange the return generated by one instrument for the
return generated by another instrument. The fund may enter into equity
swap agreements, to manage its exposure to equity markets, which involve a
commitment by one party to pay interest in exchange for a market linked
return based on a notional amount. To the extent that the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the fund will receive a payment
from or make a payment to the counterparty, respectively. Equity swaps are
marked to market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss. Payments received
or made at the end of the measurement period are recorded as realized
gains or losses. The fund could be exposed to credit or market risk due to
unfavorable changes in the fluctuation of interest rates or in the price
of the underlying security or index, the possibility that there is no
liquid market for these agreements or that the counterparty may default on
its obligation to perform.
H) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
August 31, 1998, the fund had no borrowings against the line of credit.
I) 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, as amended. 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.
At August 31, 1998, the fund had a capital loss carryover of approximately
$3,889,000 available to offset future net capital gain, if any, which will
expire on August 31, 2006.
J) 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 temporary and permanent differences of losses on wash
sale transactions, foreign currency gains and losses, post October loss
deferrals, Telebras adjustment organization costs and realized gains and
losses on passive foreign investment companies. 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, 1998, the fund reclassified
$216,982 to decrease undistributed net investment loss and $124,690 to
decrease paid-in-capital, with a increase to accumulated net realized
losses of $92,292. The calculation of net investment income per share in
the financial highlights table excludes these adjustments.
K) 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.
L) 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 August 31, 1998, to the extent
that expenses of the fund (exclusive of brokerage commissions, interest,
taxes, deferred organizational and extraordinary expense, credits from
Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments,
Inc. and payments under the Trust's distribution plan) would exceed an
annual rate of 1.85% of the fund's average net assets.
The fund reimburses Putnam Management an allocated amount 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. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended August 31, 1998 fund expenses were reduced by $45,332
under expense offset arrangements with PFTC and brokerage service
arrangements. 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.
Each Trustee of the fund receives an annual Trustee fee, of which $730 has
been allocated to the fund, 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 on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the 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 to 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.
For the year ended August 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $57,493 and $5,252 from the sale
of class A and class M shares, respectively and received $91,058 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, 1998, Putnam Mutual Funds
Corp., acting as underwriter received $1,209 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended August, 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $104,751,336 and
$89,424,172 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, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
August 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 5,346,691 $ 51,791,477
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 100,050 898,446
- -----------------------------------------------------------------------------
5,446,741 52,689,923
Shares
repurchased (4,951,391) (47,956,548)
- -----------------------------------------------------------------------------
Net increase 495,350 $ 4,733,375
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Year ended
August 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,742,794 $ 26,471,596
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 80,287 715,358
- -----------------------------------------------------------------------------
2,823,081 27,186,954
Shares
repurchased (2,538,162) (23,909,221)
- -----------------------------------------------------------------------------
Net increase 284,919 $ 3,277,733
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Year ended
August 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 298,328 $ 3,017,025
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,480 75,725
- -----------------------------------------------------------------------------
306,808 3,092,750
Shares
repurchased (332,188) (3,237,445)
- -----------------------------------------------------------------------------
Net decrease (25,380) $ (144,695)
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
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
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
John J. Morgan, Jr.
Vice President
Thomas R. Haslett
Vice President and Fund Manager
J. Peter Grant
Vice President and Fund Manager
Deborah 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
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.
- ---------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
AN004 - 45929 2AY/2CK/2CL 10/98
