Putnam
Japan Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
8-31-98
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
Dear Shareholder:
As Putnam Japan Fund's fiscal year closed on August 31, 1998, Fund Manager
Robert Swift and his colleagues in the International Growth area saw a
hint of credit easing in the Japanese government's quarter-point reduction
of the overnight call rate.
Implementation of the government's banking reform plan has been delayed,
and Japan's growing fiscal deficit may force regional governments to put
public works expenditures on hold. Instead of acting as a major catalyst
for change, the Liberal Democratic Party's losses in the recent upper
house elections and the appointment of a new prime minister have led to a
political stalemate; the opposition parties are holding up measures aimed
at resolving the banking problem in order to force a general election.
Consequently, companies that had built such a rebound into their earnings
forecasts are now adjusting them downward accordingly.
The management team is looking beyond these near-term negatives, focusing
instead on intense analysis and careful selection of stocks of companies
that the team believes will be in the best position to advance once
Japan's economy and market return to normal growth rates. The fund has
performed well against its benchmark index.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance and finance 21.2%
Electronics and electrical equipment 17.2%
Utilities 13.3%
Automotive 8.4%
Retail 6.0%
Footnote reads:
*Based on net assets as of 8/31/98. Holdings will vary over time.
Nevertheless, the team is not optimistic about any meaningful near-term
improvement in Japan's economic and market environment and believes, in
fact, that prospects for a year-end economic recovery are fading. The team
believes, however, that the solutions to Japan's existing problems are
possible. After 10 years of underperforming the U.S. market, Japanese
equities should begin to catch up.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
October 21, 1998
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 August 31, 1998, there is no guarantee the fund
will continue to hold these securities in the future. Foreign investments
may be subject to certain risks, such as currency fluctuations, economic
instability, and political developments, that are not present with
domestic investments. Investing in a single sector increases the
possibility of greater price fluctuations and does not provide the
diversification of a multisector investment. This fund invests a portion
of its assets in small-size companies. Such investments increase the risk
of greater price fluctuations.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Japan Fund is designed for investors seeking capital appreciation
primarily through common stocks of Japanese companies.
TOTAL RETURN FOR PERIODS ENDED 8/31/98
(inception 12/28/95)
MSCI Consumer
NAV POP Japan Index Price Index
- --------------------------------------------------------------------------
1 year -31.89% -35.84% -32.70% 1.62%
- --------------------------------------------------------------------------
Life of fund (since 12/28/95) -44.71 -47.90 -45.08 6.45
Annual average -19.90 -21.67 -20.13 2.37
- --------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(most recent calendar quarter)
NAV POP
- --------------------------------------------------------------------------
1 year -30.57% -34.53%
- --------------------------------------------------------------------------
Life of fund (since 12/28/95) -45.34 -48.49
Annual average -19.66 -21.37
- --------------------------------------------------------------------------
Past performance is no assurance of future results. Returns at public
offering price reflect the current maximum initial sales charge of 5.75%.
All returns assume reinvestment of distributions at NAV. Investment
returns and principal will fluctuate so that an investor's shares when
redeemed may be worth more or less than their original cost.
This 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.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 8/31/98
- ------------------------------------------------------------------------------
Distributions (number) 1
- ------------------------------------------------------------------------------
Income $0.135
- ------------------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------------------
Total $0.135
- ------------------------------------------------------------------------------
Share value: NAV POP
- ------------------------------------------------------------------------------
8/31/97 $6.65 $7.06
- ------------------------------------------------------------------------------
8/31/98 4.41 4.68
- ------------------------------------------------------------------------------
[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 MCSI Japan Consumer Price
Date shares at POP Index Index
12/28/95 9,424 10,000 10,000
8/31/96 8,836 9,228 10,248
8/31/97 7,649 8,160 10,477
8/31/98 $5,210 $5,492 $10,645
Past performance is no assurance of future results.
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 the 5.75% maximum sales charge.
COMPARATIVE BENCHMARKS
Morgan Stanley Capital International (MSCI) Japan Index is an unmanaged
list of Japanese equity securities, with all values expressed in U.S.
dollars. The 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.
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 Japan 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
Japan 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 8, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
August 31, 1998
COMMON STOCKS (96.5%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Automotive (8.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 Honda Motor Co., Ltd. $ 34,480
8,000 NHK Spring Co., Ltd. 19,071
5,000 Toyota Motor Corp. 106,775
--------------
160,326
Basic Industrial Products (5.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,000 Enplas Corp. 41,149
1,000 Hoya Corp. 33,345
2,000 Toya Seikan Kaisha 25,172
--------------
99,666
Building and Construction (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
3,000 INAX Corp. 11,281
Business Equipment and Services (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 Dai Nippon Printing Co., Ltd. 13,984
4,000 Ricoh Co., Ltd. 38,368
--------------
52,352
Computer Services and Software (5.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 Fuji Soft ABC, Inc. 35,970
7,000 Fujitsu Ltd. 71,018
--------------
106,988
Consumer Non Durables (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 KAO Corp. 15,431
Electronics and Electrical Equipment (17.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 Fanuc 32,281
500 Hirose Electric Co. Ltd. 28,060
3,000 Matsushita Electric Industrial Co. 43,207
1,000 Murata Manufacturing Co. Ltd. 33,061
2,000 Nippondenso Co., Ltd. 30,011
1,000 Secom Co. 57,750
1,000 Sony Corp. 73,146
9,000 Toshiba Corp. 32,373
--------------
329,889
Food and Beverages (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
2,000 Kirin Brewery Co. Ltd. 16,744
Insurance and Finance (21.2%)
- --------------------------------------------------------------------------------------------------------------------------
15,000 Keiyo Bank 33,523
6,000 Mitsubishi Bank Ltd. 42,483
16,000 Mitsui Marine and Fire Insurance Co., Ltd. 63,796
4,000 Nissan Fire & Marine Insurance 12,089
3,000 Nomura Securities Co. Ltd. 29,159
1,000 Orix Corp. 67,754
4,000 Sanwa Bank Ltd. 22,930
11,000 Sumitomo Marine & Fire 55,410
4,000 Sumitomo Trust & Banking 28,606
6,000 Tokio Marine & Fire Insurance Co. Ltd. 49,464
--------------
405,214
Medical Supplies and Devices (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,000 Takeda Chemical Industries 52,359
Metals and Mining (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
6,000 Hitachi Metals Ltd. 16,176
Paper and Forest Products (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
14,000 Nippon Paper Industries Co. Ltd. 45,491
Pharmaceuticals and Biotechnology (3.9%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 Sankyo Co., Ltd. 21,781
6,000 Shionogi & Co., Ltd. 32,735
1,000 Taisho Pharmaceutical Co. 20,397
--------------
74,913
Real Estate (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,000 Mitsubishi Estate Co., Ltd. 14,757
5,000 Mitsui Real Estate Sales Co. 14,083
--------------
28,840
Retail (6.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 Ito-Yokado Co., Ltd. 46,612
4,000 Seiyu, Ltd. 10,018
1,000 Seven-Eleven Japan Co., Ltd. 59,028
--------------
115,658
Telecommunications (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 Matsushita Communication Industrial Co., Ltd. 33,700
2,000 Uniden Ord 17,098
--------------
50,798
Transportation (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,000 Seino Transportation 10,074
Utilities (13.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Chubu Electric Power, Inc. 73,785
3,000 Kyushu Electric Power Inc. 43,952
18 Nippon Telegraph and Telephone Corp. 136,645
--------------
254,382
--------------
Total Common Stocks (cost $2,594,679) $ 1,846,582
SHORT-TERM INVESTMENTS (4.9%)(a) (cost $93,015)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$93,000 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 $93,015, for an effective
yield of 5.78% $ 93,015
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,687,694) (b) $ 1,939,597
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,914,390.
(b) The aggregate identified cost on a tax basis is $2,693,230, resulting in gross unrealized appreciation and
depreciation of $31,830 and $785,463, respectively, or net unrealized depreciation of $753,633.
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 $2,687,694) (Note 1) $1,939,597
- -----------------------------------------------------------------------------------------------
Cash 349
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 223
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 74
- -----------------------------------------------------------------------------------------------
Receivable from Manager (Note 2) 19,478
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 2,996
- -----------------------------------------------------------------------------------------------
Total assets 1,962,717
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,155
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 484
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,085
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 10
- -----------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 3,662
- -----------------------------------------------------------------------------------------------
Payable for auditing 34,012
- -----------------------------------------------------------------------------------------------
Payable for legal 983
- -----------------------------------------------------------------------------------------------
Other accrued expenses 3,936
- -----------------------------------------------------------------------------------------------
Total liabilities 48,327
- -----------------------------------------------------------------------------------------------
Net assets $1,914,390
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,630,168
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,336)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (966,350)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (748,092)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,914,390
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per share
($1,914,390 divided by 434,099 shares) $4.41
- -----------------------------------------------------------------------------------------------
Offering price per share (100/94.25 of $4.41)* $4.68
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended August 31, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $3,602) $ 19,674
- -----------------------------------------------------------------------------------------------
Interest 239
- -----------------------------------------------------------------------------------------------
Total investment income 19,913
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 18,352
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 5,328
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,564
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 43
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 252
- -----------------------------------------------------------------------------------------------
Reports to shareholders 4,359
- -----------------------------------------------------------------------------------------------
Registration fees 6
- -----------------------------------------------------------------------------------------------
Auditing 35,625
- -----------------------------------------------------------------------------------------------
Legal 4,073
- -----------------------------------------------------------------------------------------------
Postage 130
- -----------------------------------------------------------------------------------------------
Other 16
- -----------------------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (37,486)
- -----------------------------------------------------------------------------------------------
Total expenses 33,262
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (5,096)
- -----------------------------------------------------------------------------------------------
Net expenses 28,166
- -----------------------------------------------------------------------------------------------
Net investment loss (8,253)
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (574,480)
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,336)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 14
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (318,069)
- -----------------------------------------------------------------------------------------------
Net loss on investments (893,871)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(902,124)
- -----------------------------------------------------------------------------------------------
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 (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment loss $ (8,253) $ (14,502)
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (575,816) (324,719)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (318,055) (126,020)
- ---------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (902,124) (465,241)
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (57,361) (29,097)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- (72,178)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (170,696) 591,344
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (1,130,181) 24,828
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 3,044,571 3,019,743
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income and undistributed net
investment income of $1,336 and $57,227, respectively) $ 1,914,390 $3,044,571
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended Dec. 28, 1995+
operating performance August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $6.65 $7.97 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (c) (.01) (.03) (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (2.09) (1.02) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (2.10) (1.05) (.53)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.14) (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.19) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.14) (.27) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $4.41 $6.65 $7.97
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (31.89) (13.43) (6.24)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,914 $3,045 $3,020
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.45 1.46 .98*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%)(c) (.36) (.50) (.29)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 59.07 100.61 46.39*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through brokerage service and expense offset arrangements. (Note 2).
(c) Reflects an expense limitation during the period (Note 2). As a result of such limitation, expenses for
the fund for the year ended August 31, 1998, and August 31, 1997, and the period ended
August 31, 1996, reflect a reduction of $0.05, $0.05 and $0.04 per share, respectively.
</TABLE>
Notes to financial statements
August 31, 1998
Note 1
Significant accounting policies
Putnam Japan Fund (the "fund") is one of a series of Putnam Investments
Funds (the "Trust") which is registered under the Investment Company Act
of 1940, as amended, as an open-end diversified management investment
company. The objective of the fund is to seek long-term capital
appreciation by investing primarily in common stocks and equity
securities, including securities convertible into common stocks or other
equity securities, of Japanese companies.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value which is determined using the last
reported sale price on its principle exchange, or if no sales are reported
- -- as is 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. All 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, 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) 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.
G) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies. It is also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986, 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
$613,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------------------------------------------------------------------
$ 46,000 August 31, 2005
567,000 August 31, 2006
H) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid 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, post-October loss deferrals, and organization costs.
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 $7,051 to decrease distributions in excess of
net investment income and $8,387 to decrease paid-in-capital, with a
decrease to accumulated net realized loss on investments of $1,336. The
calculation of net investment income per share in the financial highlights
table excludes these adjustments.
I) Expenses of the Trust Expenses directly charged or attributable to any
fund will be paid from the assets of that fund. Generally, expenses of the
trust will be allocated among and charged to the assets of each fund on a
basis that the Trustees deem fair and equitable, which may be based on the
relative assets of each fund or the nature of the services performed and
relative applicability to each fund.
J) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public
offering of its shares were $3,662. These expenses are being amortized on
projected net asset levels over a five-year period. The fund will
reimburse Putnam Management for these expenses.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.80% of the first $500
million of average net assets, 0.70% of the next $500 million, 0.65% of
the next $500 million, 0.60% of the next $5 billion, 0.575% of the next $5
billion, 0.555% of the next $5 billion, 0.54% of the next $5 billion, and
0.53% thereafter.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through December 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 1.45% 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 $5,096
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 $100 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 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.
For the year ended August 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received no net commissions from the sale of shares.
Note 3
Purchases and sales
During the year ended August 31, 1998 purchases and sales of investment
securities other than short-term investments aggregated $1,324,524 and
$1,518,969, 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
Year ended
August 31, 1998
- -----------------------------------------------------------------------------
Shares Amount
- -----------------------------------------------------------------------------
Shares sold 103,751 $ 532,979
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 11,518 57,361
- -----------------------------------------------------------------------------
115,269 590,340
Shares
repurchased (138,671) (761,036)
- -----------------------------------------------------------------------------
Net decrease (23,402) $(170,696)
- -----------------------------------------------------------------------------
Year ended
August 31, 1997
- -----------------------------------------------------------------------------
Shares Amount
- -----------------------------------------------------------------------------
Shares sold 342,830 $ 2,631,727
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 14,169 101,162
- -----------------------------------------------------------------------------
356,999 2,732,889
Shares
repurchased (278,306) (2,141,545)
- -----------------------------------------------------------------------------
Net increase 78,693 $ 591,344
- -----------------------------------------------------------------------------
At August 31, 1998, Putnam Investments, Inc. owned 400,150 shares of the
fund (92.2% of shares outstanding), valued at $1,764,662.
Federal tax information
(Unaudited)
For the period, interest and dividends from foreign countries were $23,276
or $.054 per share. Taxes paid to foreign countries were $3,602 or $.008
per share.
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
John J. Morgan, Jr.
Vice President
Carol McMullen
Vice President
Brett C. Browchuk
Vice President
Robert Swift
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 Japan Fund.
It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy
of Putnam's Quarterly Performance Summary. For more information or to
request a prospectus, call toll free: 1-800-225-1581. 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.
45970 2AWA 10/98
