Putnam
International
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
8-31-98
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
As the financial turmoil of 1998 spreads from one international market to
another, investors in Putnam International Fund can breathe a sigh of
relief for the moment. Your fund not only had a positive return of 5.29%
for the 12 months ended August 31, 1998, but fulfilled its goal of
outperforming its benchmark, the MSCI-EAFE (Morgan Stanley Capital
International) the Europe, Australasia, and Far East Index, which returned
- -0.14% over the same period. For complete performance information, see
pages 4 and 5.
Your fund uses both stock and country selection strategies to outperform
the benchmark. Both strategies were instrumental in meeting the fund's
goals.
Putnam International Fund is designed to have a relatively low tracking
error versus the MSCI-EAFE index. A number of important decisions
involving smaller countries and stocks produced a very attractive
risk/reward ratio for the fund. The fund exceeded its benchmark with a
relative risk of only 4.2% in the 1998 fiscal year.
Given the collapse of many economies around the world during the past
fiscal year, it should be no surprise that country selection was an
instrumental factor in your fund's outperformance this year. The decision
of managers Justin Scott and Seung Minn to underweight Japan and to avoid
Malaysia and most of the other Pacific Rim countries enabled the fund to
sidestep a fair amount of market turmoil while generating favorable
returns from investments in France, Switzerland, the United Kingdom, and
Ireland.
Even though your fund performed relatively well throughout a turbulent
year, it is important to remember that markets run in cycles. What goes up
eventually comes down, and what is down eventually comes up. We reiterate
our belief that a balanced portfolio of international and domestic stock,
bond, and money market funds can help investors achieve their financial
goals in all kinds of market cycles and that Putnam International Fund can
provide a worthwhile opportunity for international diversification.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Vodafone Group, PLC
United Kingdom
Rohm Co., Ltd.
Japan
Promodes
France
British Petroleum Co., PLC
United Kingdom
Julius Baer Holdings, AG
Switzerland
BMW (Bayerische Motoren Werke), AG
Germany
Nestle, S.A.
Switzerland
Sony Corp.
Japan
Novartis AG, ADR
Switzerland
ENI (Ente Nazionale Idrocarburi), SPA
Italy
These holdings represent 22.4% of the fund's net assets as of 8/31/98.
Portfolio holdings will vary over time.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
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. International
investing involves certain risks, including economic instability,
political developments, and currency fluctuations, not present with U.S.
investments.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
International Fund is designed for investors seeking long-term capital
appreciation primarily through common stocks of companies located outside
the United States.
TOTAL RETURN FOR PERIODS ENDED 8/31/98
(inception 12/28/95)
MSCI
EAFE Consumer
NAV POP Index Price Index
- ------------------------------------------------------------------------
1 year 5.29% -0.73% -0.14% 1.62%
- ------------------------------------------------------------------------
Life of fund (since 12/28/95) 21.61 14.60 10.73 6.45
Annual average 7.60 5.24 3.90 2.37
- ------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(most recent calendar quarter)
NAV POP
- -------------------------------------------------------------------------
1 year -5.70% -11.11%
- -------------------------------------------------------------------------
Life of fund (since 12/28/95) 17.56 10.79
Annual average 6.04 3.78
- -------------------------------------------------------------------------
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 net asset value and
represent past performance; they do not guarantee future results.
Investment returns and principal will fluctuate so that an investor's
shares when redeemed may be worth more or less than their original cost.
Performance data reflect expense limitations currently in effect. Without
the expense limitation, total returns would have been lower.
This performance information does not reflect any market volatility that
may have occurred since the date of the information shown. 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 $0.064
- -------------------------------------------------------------------------
Capital gains
- -------------------------------------------------------------------------
Long-term $0.093
- -------------------------------------------------------------------------
Total $0.157
- -------------------------------------------------------------------------
Share value: NAV POP
- -------------------------------------------------------------------------
8/31/97 $9.58 $10.16
- -------------------------------------------------------------------------
8/31/98 9.92 10.53
- -------------------------------------------------------------------------
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investments since
12/28/95
Fund's class A MSCI/EAFE Consumer Price
Date shares at POP Index Index
12/28/95 9,425 10,000 10,000
8/31/96 9,512 10,168 10,248
8/31/97 10,885 11,088 10,477
8/31/98 $11,460 $11,073 $10,645
Footnote reads:
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
Europe, Australasia, and the Far East (EAFE) component of the Morgan
Stanley Capital International World Index is an unmanaged list of equity
securities listed on the stock exchanges of Europe, Australasia, and the
Far East, 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 International 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
International 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 (98.4%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Australia (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
10,164 Goodman Fielder Ltd. ADR $ 11,897
1,000 Rio Tinto Ltd. 9,684
4,000 Westpac Banking Corp. 21,241
--------------
42,822
Austria (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
200 VA Technologies AG 19,561
Belgium (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
150 Electrabel S.A. 48,877
Denmark (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
300 Danisco A/S 19,952
Finland (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
800 Oy Nokia AB Class A 56,867
France (12.3%)
- --------------------------------------------------------------------------------------------------------------------------
300 Banque Nationale de Paris 19,848
200 Bouygues SA 38,289
320 Compagnie Financiere de Paris 26,972
600 Elf Aquitaine S.A. 59,466
100 L'OREAL 53,977
1,414 Michelin Corp. Class B 60,129
150 Promodes 97,560
113 Societe Generale 19,910
400 Total Corp. ADR 19,225
200 Total Corp. Class B 19,449
300 Vivendi 59,873
--------------
474,698
Germany (9.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,200 Bayer AG 45,226
100 Bayerische Motoren Werke (BMW) AG 74,580
30 Bayerische Motoren Werke (BMW) AG NEW 22,025
1,000 Deutsche Bank AG 62,454
2,000 Deutsche Telekom AG 53,174
500 Mannesmann AG 45,260
500 Veba (Vereinigte Elektrizitaets Bergwerks) AG 25,300
470 Volkswagon AG 33,929
--------------
361,948
Hong Kong (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
6,000 Amoy Properties Ltd. 2,885
2,000 Dao Heng Bank Group Ltd. 1,988
2,000 Guoco Group Ltd. 1,207
6,000 Henderson Land Development Co. Ltd. (R) 17,889
4,000 Hong Kong Electric Holdings Ltd. 11,874
3,000 Hutchison Whampoa, Ltd. 13,010
4,048 Sun Hung Kai Properties Ltd. 12,435
--------------
61,288
Ireland (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
4,311 Allied Irish Banks PLC 59,336
2,188 Bank of Ireland 33,708
1,024 CRH PLC 11,173
6,000 Greencore Group PLC 23,962
--------------
128,179
Italy (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
12,800 Ente Nazionale Idrocarburi SPA 67,873
5,000 Telecom Italia Mobile SPA 32,968
4,000 Telecom Italia SPA 31,032
--------------
131,873
Japan (16.2%)
- --------------------------------------------------------------------------------------------------------------------------
3,000 Bridgestone Corp. 66,194
3,000 Canon, Inc. 60,979
2,000 Dai Nippon Printing Co., Ltd. 27,967
1,000 Fuji Photo Film Co. 32,281
1,000 Ito-Yokado Co., Ltd. 46,612
1,000 KAO Corp. 15,431
1,000 Kurita Water Industries Ltd. 10,571
7,000 Mitsui Fudoscan Co., Ltd. 37,694
2,000 Omron Corp. 21,852
1,000 Onward Kashiyama Co. Ltd. 12,281
1,000 Promise Co., Ltd. 41,859
1,000 Ricoh Co., Ltd. 9,592
1,000 Rohm Co. Ltd. 102,164
1,000 Sankyo Co., Ltd. 21,781
1,000 Sony Corp. 73,147
1,000 Takefuji Corp. 44,910
--------------
625,315
Netherlands (7.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,876 ABN AMRO Holding N.V. 65,261
800 Akzo-Nobel N.V. 32,959
909 Internationale Nederlanden Groep 53,721
2,040 Koninklijke Ahold N.V. 60,179
300 KPN NV 13,600
600 Philips Electronics N.V. 39,272
300 TNT Post Group N.V. 6,323
395 Vedior NV 11,943
400 Vendex International N.V. 13,756
--------------
297,014
New Zealand (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,500 Telecom Corp. of New Zealand Ltd. 9,631
3,800 Telecom New Zealand Ltd. 7,169
--------------
16,800
Norway (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 Christiana Bank & Trust 3,126
500 Saga Petroleum ASA Class B 4,888
--------------
8,014
Portugal (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
598 Banco Comercial Portugues, S.A. 16,653
600 Electricidade de Portugal S.A. 14,021
600 Portugal Telecom S.A. 27,476
--------------
58,150
Singapore (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
7,000 DBS Land Ltd. 3,989
1,600 Development Bank of Singapore Ltd. 5,551
1,000 Keppel Land Ltd. 353
2,000 Oversea Chinese Banking Corp. 5,168
3,000 United Overseas Bank Ltd. 7,109
--------------
22,170
Spain (4.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,200 Banco de Bilbao Vizcaya (BBV) 15,916
851 Banco Santander S.A. 15,962
850 Banco Santander S.A. Rights (expiration date 9/15/98) (NON) 318
850 Banco Santander S.A. Rights (expiration date 9/30/98) (NON) 6
2,500 Iberdola S.A. 36,927
2,050 Superdiplo S.A. (NON) 50,811
1,745 Telfonica de Espana 66,981
--------------
186,921
Sweden (5.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,500 Astra AB 25,230
1,500 Electrolux AB 24,019
1,000 Ericsson Class B 23,399
1,000 Pharmacia & Upjohn, Inc. 43,818
500 Sandvik AB Class A 10,241
2,000 Skandia Forsakrings AB 28,178
1,300 Svenska Cellulosa AB Class B 27,756
700 Volvo AB 19,377
--------------
202,018
Switzerland (9.2%)
- --------------------------------------------------------------------------------------------------------------------------
40 ABB AG 46,708
30 Julius Baer Holdings AG 83,160
40 Nestle S.A. 74,345
45 Novartis AG ADR 70,135
150 United Bank of Switzerland 48,545
50 Zurich Allied AG 30,007
--------------
352,900
United Kingdom (17.7%)
- --------------------------------------------------------------------------------------------------------------------------
4,195 B A T Industries PLC 41,315
500 Bass PLC 6,728
1,000 British Airways PLC 7,533
7,108 British Petroleum Co. PLC 89,849
3,500 Burmah Castrol PLC 55,314
2,000 Cable & Wireless Communications (NON) 17,683
2,000 Glaxo Wellcome PLC 60,397
500 Granada Group PLC 6,459
813 HSBC Holdings PLC 17,270
1,344 HSBC Holdings PLC (75P) 27,942
700 Molins PLC 1,527
3,000 Rio Tinto Ltd. 29,393
1,000 Royal & Sun Alliance Insurance Group PLC 8,422
6,012 Scottish Power PLC 58,249
6,000 Securicor Group PLC Class A 52,344
2,000 Siebe PLC 7,046
4,000 Smiths Industries PLC 43,485
5,000 Tomkins PLC 20,720
9,275 Vodafone Group PLC 129,620
--------------
681,296
--------------
Total Common Stocks (cost $3,424,145) $ 3,796,663
SHORT-TERM INVESTMENTS (1.8%) (a) (cost $68,011)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$68,000 Interest in $750,000,000 joint 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
$68,011 for an effective yield of 5.78% $ 68,011
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $3,492,156) (b) $ 3,864,674
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,858,219.
(b) The aggregate identified cost on a tax basis is $3,492,478, resulting in gross unrealized appreciation and
depreciation of $743,661 and $371,465, respectively, or net unrealized appreciation of $372,196.
(NON) Non-income-producing security.
(R) Real Estate Investment Trust.
ADR after the name of a foreign holding stands for American Depository Receipts representing ownership of
foreign securities on deposit with a domestic custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
August 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $3,492,156) (Note 1) $3,864,674
- -----------------------------------------------------------------------------------------------
Cash 650
- -----------------------------------------------------------------------------------------------
Foreign Currency (cost $18,587) 18,925
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,121
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 12,120
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 2,867
- -----------------------------------------------------------------------------------------------
Total assets 3,901,357
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 28,972
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,108
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 539
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 646
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 7
- -----------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 3,662
- -----------------------------------------------------------------------------------------------
Other accrued expenses 7,204
- -----------------------------------------------------------------------------------------------
Total liabilities 43,138
- -----------------------------------------------------------------------------------------------
Net assets $3,858,219
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,320,658
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 15,391
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
and foreign currency transactions (Note 1) 150,076
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets
and liabilities in foreign currencies 372,094
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $3,858,219
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per share
($3,858,219 divided by 388,869 shares) $9.92
- -----------------------------------------------------------------------------------------------
Offering price per share (100/94.25 of $9.92)* $10.53
- -----------------------------------------------------------------------------------------------
* 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 $9,932) $ 69,108
- -----------------------------------------------------------------------------------------------
Interest 1,119
- -----------------------------------------------------------------------------------------------
Total investment income 70,227
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 32,260
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 8,062
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,525
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 40
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses 650
- -----------------------------------------------------------------------------------------------
Reports to shareholders 3,134
- -----------------------------------------------------------------------------------------------
Auditing 24,464
- -----------------------------------------------------------------------------------------------
Legal 3,761
- -----------------------------------------------------------------------------------------------
Other 31
- -----------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (15,856)
- -----------------------------------------------------------------------------------------------
Total expenses 59,071
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (4,922)
- -----------------------------------------------------------------------------------------------
Net expenses 54,149
- -----------------------------------------------------------------------------------------------
Net investment income 16,078
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 150,665
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (153)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (321)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 24,473
- -----------------------------------------------------------------------------------------------
Net gain on investments 174,664
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $190,742
- -----------------------------------------------------------------------------------------------
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 income $ 16,078 $ 25,722
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 150,512 36,743
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets
and liabilities in foreign currencies 24,152 396,071
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 190,742 458,536
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (24,481) (31,476)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments (35,574) (48,509)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 63,880 141,025
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 194,567 519,576
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 3,663,652 3,144,076
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $15,391 and $23,923, respectively) $3,858,219 $3,663,652
- ---------------------------------------------------------------------------------------------------------------
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 $9.58 $8.58 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (c) .04 .07 .08
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments .45 1.15 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .49 1.22 .08
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.06) (.09) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.09) (.13) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.15) (.22) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.92 $9.58 $8.58
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and suplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 5.29 14.43 0.94*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,858 $3,664 $3,144
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b)(c) 1.47 1.45 .98*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%)(c) .40 .74 .96*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 38.61 76.09 48.18*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset and brokerage service 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 for the period ended August 31, 1998, August 31, 1997, and August 31, 1996,
reflect a reduction of $0.04, $0.03, and $0.05 per share, respectively.
</TABLE>
Notes to financial statements
August 31, 1998
Note 1
Significant accounting policies
Putnam International 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 equity securities of issues which
have a principle place of business located outside of the United States or
whose securities are principally traded on foreign markets.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price.
Short-term investments having remaining maturities of 60 days or less are
stated at amortized cost, which approximates market value following
procedures approved by the Trustees. Foreign securities quoted in foreign
currencies are translated in 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) 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.
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 and foreign currency gains and losses. 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 $129 to decrease undistributed net investment income and $23
to decrease paid-in-capital, with an increase to accumulated net realized
gain on investments of $152. 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 the payment of these expenses.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.80% of the first $500
million of average net assets, 0.70% of the next $500 million, 0.65% of
the next $500 million, 0.60% of the next $5 billion, 0.575% of the next $5
billion, 0.555% of the next $5 billion, 0.54% of the next $5 billion, and
0.53% thereafter.
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 $4,922
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.
During the year ended August 31, 1998, Putnam Mutual Funds Corp., acting
as underwriter, received no monies from net commissions from the sale of
shares of the fund.
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 $1,565,078 and
$1,498,584, 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
- -----------------------------------------------------------------------------
Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,111 $25,296
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,415 60,048
- -----------------------------------------------------------------------------
8,526 85,344
Shares
repurchased (2,114) (21,464)
- -----------------------------------------------------------------------------
Net increase 6,412 $63,880
- -----------------------------------------------------------------------------
Year ended
August 31, 1997
- -----------------------------------------------------------------------------
Shares Amount
- -----------------------------------------------------------------------------
Shares sold 8,856 $ 80,064
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 9,185 79,985
- -----------------------------------------------------------------------------
18,041 160,049
Shares
repurchased (2,035) (19,024)
- -----------------------------------------------------------------------------
Net increase 16,006 $141,025
- -----------------------------------------------------------------------------
At August 31, 1998, Putnam Investments, Inc. owned 367,771 shares of the
fund (94.6% of shares outstanding), valued at $3,648,288.
Federal tax information
(Unaudited)
Pursuant to section 852 of the Internal Revenue Code, the fund hereby
designates $185,972 as capital gain, which includes $60,326 as 20% capital
gain, for its taxable year ended August 31, 1998.
For the period, interest and dividends from foreign countries were
$78,960. Taxes paid to foreign countries were $9,932.
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
Justin M. Scott
Vice President and Fund Manager
Seung Minn
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 International
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.
45964 2AX 10/98
