Putnam
International
New Opportunities
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "This fund is more aggressive than most. Of Putnam foreign offerings,
it's the only one that invests using a pure growth-oriented approach."
-- Morningstar 9/08/98
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
19 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
There is no question that market volatility such as we have been
experiencing over the past year generates uneasiness among equity
investors. But it is important for investors to keep in mind that
uncertainty also creates investment opportunities for those who choose to
look beyond the turmoil.
That is why Putnam International New Opportunities Fund's management team
is doing more than maintaining a defensive posture in the face of what it
is convinced is a transitory condition. You might also find it interesting
to note that in this topsy-turvy market environment, the managers are
trimming back on such traditional growth areas as technology. Instead,
they are finding opportunities in such sectors as pharmaceuticals, food
services, and retailing -- the areas that serve people's everyday needs.
In the following report, the managers provide a detailed discussion of
your fund's fiscal 1998 performance and offer their insights on what may
be in store for the fiscal year that has just begun.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
Report from the Fund Managers
Robert J. Swift
Jack P. Chang
Deborah Farrell
Stephen Oler
The financial and economic problems that gripped the Asian markets at the
start of Putnam International New Opportunities Fund's fiscal year moved
around the world in a series of rapid-fire events. Although the world
markets enjoyed some stabilization -- and even an incipient uptick in the
Asian markets -- late in the fiscal year, the fund's annual period proved
extremely challenging.
It was within this environment that, for the 12 months ended September 30,
1998, the fund's class A shares had a total return of -12.37% at net asset
value (-17.41% at public offering price). Of course, since the fund
targets both established and emerging markets, we evaluate performance
against both the Morgan Stanley Capital International EAFE Index (which
represents established markets) and the Morgan Stanley Capital
International Emerging Markets Index (which represents emerging markets).
For comparison purposes, the MSCI EAFE Index had a total return of -8.34%
and the MSCI Emerging Markets returned -47.43%. For more performance
information, including results for other share classes, please turn to
page 9.
* EMERGING-MARKETS EXPOSURE REDUCED AS RISK PERCEPTIONS RISE
The currency and stock market instability that had begun in Asia in July
1997 spread through markets in Russia, Latin America, and finally the
United States and Europe in the form of lower economic growth prospects.
Aside from what were at times extreme amounts of volatility witnessed in
currency and securities markets, these developments had negative
implications for earnings growth around the world.
The most obvious areas of concern were the emerging markets. During the
period, we sought to reduce the fund's exposure to these troubled areas.
Even the best-run companies in places such as Asia, Brazil, and Mexico
have seen their stock prices battered by investors with a complete
aversion to anything other than the safest, most liquid securities. Share
price declines were compounded by currency devaluations against the U.S.
dollar.
Two notable exceptions in our move to reduce the fund's emerging-markets
exposure were Greece and Portugal. These markets -- like other peripheral
European markets such as Ireland, Spain, and Italy -- have enjoyed the
benefits of falling interest rates related to the advent of European
Economic and Monetary Union (EMU) in 1999.
The Greek and Portuguese markets also offer rapidly growing companies that
are well positioned in fast-growing industries such as telecommunications.
Hellenic Telecom Organization and Telecel of Portugal are two examples.
While these holdings, along with others discussed in this report, were
viewed favorably at the end of the period, all are subject to review and
adjustment in accordance with the fund's investment strategy and may vary
in the future.
* EUROPEAN HOLDINGS RE-POSITIONED
In late summer and early fall of this year, after negative earnings
announcements from several high-profile European companies representing a
variety of industries, it became apparent that Europe could not completely
escape the problems affecting the rest of the world.
[GRAPHIC OMITTED: horizontal bar chart of COUNTRY ALLOCATIONS]
COUNTRY ALLOCATIONS*
United Kingdom 15.6%
Netherlands 11.5%
Japan 10.0%
Germany 7.7%
France 7.6%
Italy 6.2%
Sweden 6.1%
Canada 4.5%
Spain 4.3%
Footnote reads:
*Based on net assets as of 9/30/98. Holdings will vary over time.
Aware of the negative effects of Asia, we had begun to reduce the fund's
exposure to holdings in industries such as information technology
services, software, and banking -- stocks that bore the brunt of this
change in sentiment in Europe. Instead, we targeted somewhat more
defensive industries such as retail, media, food services, and
pharmaceuticals that we believe still have the potential for positive
earnings revisions despite current conditions. Some examples included
Dutch professional publisher Wolters Kluwer, French retailer Promodes,
supermarket chains Koninklijke Ahold in the Netherlands and Superdiplo in
Spain, and the Irish pharmaceutical company Elan.
Despite some setbacks near the end of the fund's reporting period, we
continued to target the telecommunications and telecommunications
equipment areas. In particular, we looked for companies with good pricing
power that could take advantage of the growth in cellular subscribers.
Thus we maintained large positions in British cellular company Vodafone
and the well-known Finnish handset firm Nokia. We also focused on
telecommunications companies specializing in strong related industries,
such as business data communication. Equant of the Netherlands is known as
a specialist in this area.
* FUND SEEKS TO CAPITALIZE ON POTENTIAL FOR RECOVERY IN ASIA
Japan's lingering recession and Asia's continuing economic downturn
combined to create a difficult investment environment for most of the
fiscal year. The Japanese government's inability to fashion a credible
rescue plan for that country's ailing banking sector has forestalled a
pickup in Japanese demand as well as any potential recovery in Asia.
We now anticipate a more relaxed monetary policy from both the U.S.
Federal Reserve Board and eventually the European Central Bank. We also
anticipate that the Japanese government will speed up the political
process required to rescue Japanese banks and to revive the domestic
economy. The likelihood of these positive developments leads us to believe
that there is a reasonable chance for the world equity markets to
experience a quick recovery. As interest rates decline in Europe and
corporate Japan reforms, we believe markets will revert to normal
valuations.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Equant N.V. (Netherlands)
Networking
Vodafone Group PLC (United Kingdom)
Telephone services
Compass Group PLC (United Kingdom)
Consumer services
Nokia OYJ Class A (Finland)
Telecommunications equipment
Promodes (France)
Supermarkets
Wolters Kluwer N.V. (Netherlands)
Publishing
Aegon N.V. (Netherlands)
Insurance
Superdiplo S.A. (Spain)
Supermarkets
Nestle S.A. (Switzerland)
Food and beverages
Koninklijke Ahold N.V. (Netherlands)
Supermarkets
Footnote reads:
These holdings represent 22.5% of the fund's net assets as of 9/30/98.
Portfolio holdings will vary over time.
We are finding opportunities in the Japanese pharmaceutical and medical
supply industries. We believe stocks of these companies are priced more
attractively than their U.S. and European counterparts, yet they have
similar growth prospects. We have also increased our exposure to the
electronic hardware area by adding to semiconductor companies such as ASM
Lithography, Samsung Electronics of South Korea, and Taiwan Semiconductor
Manufacturing Company. We believe that after several years of flat demand
and weak pricing, manufacturers have reduced capacity and the
semiconductor market is starting to show some signs of improvement.
Additionally, we have increased our allocation to emerging markets by
adding attractively valued, high-quality companies located in solid
economies whose stock prices have suffered significant declines as a
result of recent turmoil in world financial markets.
* FOCUS REMAINS ON LONG-TERM GROWTH
Increasingly flexible economies, mobile capital flows, and a rising level
of shareholder orientation are combining to improve the quality and
quantity of international equity investments. These trends encourage more
companies to go public, drive faster growth, and create an increasing
number of suitable opportunities for this fund. Therefore, we will
continue to seek emerging- and developed-markets companies from a mix of
market capitalizations that exhibit superior sales rates and earnings
growth as well as strong positions in their respective industries.
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 9/30/98, there is no guarantee the fund will
continue to hold these securities in the future. This fund invests all or
a portion of its assets in small to midsize companies. Such investments
increase the risk of greater price fluctuations. International investing
involves certain risks, such as currency fluctuations, economic
instability, and political developments, not present with domestic
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 New Opportunities Fund is designed for investors seeking
long-term capital appreciation through investing primarily in the stocks
of companies outside the United States.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
Class A Class B Class M
(inception date) (1/3/95) (7/21/95) (7/21/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year -12.37% -17.41% -12.98% -16.92% -12.76% -15.82%
- ------------------------------------------------------------------------------
Life of fund 40.89 32.77 37.17 34.17 38.52 33.66
Annual average 9.60 7.87 8.82 8.18 9.10 8.07
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/98
MSCI
MSCI Emerging Consumer
EAFE Markets Price
Index Index Index
- ---------------------------------------------------------------------------
1 year -8.34% -47.43% 1.36%
- ---------------------------------------------------------------------------
Life of fund 19.37 -45.82 9.15
Annual average 4.84 -15.08 2.36
- ---------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
5.75% and 3.50%, respectively. Class B share returns for the 1-year and
life-of-fund periods reflect the applicable contingent deferred sales
charge (CDSC), which is 5% in the first year, declines to 1% in the sixth
year, and is eliminated thereafter. Returns shown for class B and class M
shares for periods prior to their inception are derived from the
historical performance of class A shares, adjusted to reflect both the
initial sales charge or CDSC, if any, currently applicable to each class
and in the case of class B and class M shares, the higher operating
expenses applicable to such shares. All returns assume reinvestment of
distributions at NAV. Investment return and principal value will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost. Performance data reflects an expense limitation
previously in effect. Without it, 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. As a result, more
recent returns may be more or less than those shown.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
1/3/95
Fund's class A MSCI EAFE MSCI Emerging Consumer Price
Date shares at POP Index Markets Index Index
1/3/95 9,425 10,000 10,000 10,000
3/31/95 9,922 10,186 8,869 10,200
9/30/95 11,408 10,688 9,274 10,300
3/31/96 12,256 11,443 9,504 10,400
9/30/96 12,978 11,609 9,723 10,500
3/31/97 14,070 11,609 10,403 10,600
9/30/97 15,151 13,023 10,306 10,700
3/31/98 15,708 13,769 8,931 10,800
9/30/98 $13,277 $11,937 $5,418 $10,915
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $13,717 ($13,417 with a contingent deferred sales charge);
a $10,000 investment in the fund's class M shares would have been valued
at $13,852 ($13,366 at public offering price). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 1 1 1
- ------------------------------------------------------------------------------
Income $0.0080 $-- $--
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term 0.4410 0.4410 0.4410
- ------------------------------------------------------------------------------
Short-term 0.6673 0.6673 0.6673
- ------------------------------------------------------------------------------
Return of capital* 0.0007 0.0007 0.0007
- ------------------------------------------------------------------------------
Total $1.1170 $1.1090 $1.1090
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
9/30/97 $13.60 $14.43 $13.45 $13.51 $14.00
- ------------------------------------------------------------------------------
9/30/98 10.81 11.47 10.61 10.69 11.08
- ------------------------------------------------------------------------------
*See page 30.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 5.75% maximum sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Morgan Stanley Capital International (MSCI) Emerging Markets Index* is an
unmanaged list of equity securities from emerging markets with all values
expressed in U.S. dollars.
MSCI EAFE Index* is an index of approximately 1,045 equity securities
issued by companies located in 18 countries and listed on the stock
exchanges of Europe, Australasia, and the Far East. All values are
expressed in U.S. dollars.
*A securities index assumes reinvestment of all distributions and interest
payments and does not take into account brokerage fees or taxes.
Securities in the fund do not match those in the index and performance of
the fund will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended September 30, 1998
To the Trustees of Putnam Investment Funds and
Shareholders of Putnam International New Opportunities 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 New Opportunities Fund (the "fund") at September 30, 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 September
30, 1998 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 12, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998
COMMON STOCKS (97.6%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Advertising (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
41,373 Publicis S.A. (France) $ 6,697,627
Airlines (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
303,200 Ryanair Holdings, PLC ADR (Ireland) (NON) 10,384,600
Apparel (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
109,800 Hennes & Mauritz AB Class B (Sweden) 7,961,076
Automobiles (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
18,153 Bayerische Motoren Werke (BMW) AG (Germany) 11,692,316
Banks (4.8%)
- --------------------------------------------------------------------------------------------------------------------------
487,200 Allied Irish Banks PLC (Ireland) 7,130,805
6,139,700 Banca di Roma SPA (Italy) (NON) 10,991,337
1,323,000 Banca San Paolo di Brescia SPA (Italy) 6,021,469
155,700 Banco Frances del Rio de la Plata ADR (Argentina) 3,016,688
67,960 Bank of Greece, S.A. (Greece) 9,182,507
2,450,700 Credito Italiano SPA (Italy) 10,231,986
758,801 HSBC Holdings PLC (United Kingdom) 14,203,671
434,111 Turkey Is Bankasi GDR (Turkey) (NON) 1,085,278
2,854 Verwaltungs-und Privat-Bank AG (Switzerland) 8,375,870
151,800 Yapi ve Kredi Bankasi A.S. GDR (Turkey) (NON) 1,631,850
--------------
71,871,461
Brewing (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
466,200 Cia Cervejaria Brahma ADR (Brazil) 3,642,188
218,500 South African Breweries, Ltd. (South Africa) 3,270,118
--------------
6,912,306
Broadcasting (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
63,186 EM.TV & Merchandising AG (Germany) 21,011,522
160,500 Grupo Televisa S.A. GDR (Mexico) 3,099,656
101,000 Television Francaise 1 (France) 17,324,804
--------------
41,435,982
Building Products (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
224,300 Assa Abloy AB Class B (Sweden) 8,074,401
874,900 Cemex S.A. de C.V. Class B (Mexico) (NON) 2,191,556
--------------
10,265,957
Business Equipment and Services (3.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,105,000 Fomento Economico Mexicano, S.A. de C.V. (Mexico) 2,207,825
507,400 Meitec (Japan) 10,949,746
36,000 Prolion Holding N.V. (Netherlands) (NON) 3,727,041
353,050 Securitas AB Class B (Sweden) (NON) 18,053,311
427,200 Select Appointments Holdings PLC ADR (United Kingdom) 7,422,600
820,400 Serco Group PLC (United Kingdom) (NON) 14,785,369
--------------
57,145,892
Cellular Communications (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
93,500 STET Hellas Telecommunications S.A. ADR (Greece) (NON) 2,898,500
172,647 Telecel-Comunicacaoes Pessoais, S.A. (Portugal) 22,328,399
2,632,800 Telecom Italia Mobile SPA (Italy) 15,370,015
--------------
40,596,914
Computer Services (6.2%)
- --------------------------------------------------------------------------------------------------------------------------
62,400 Admiral PLC (United Kingdom) 1,303,709
74,865 Atos S.A. (France) (NON) 13,336,741
1,465,400 Capita Group PLC (United Kingdom) 15,084,118
1,423,300 CGI Group, Inc. (Canada) (NON) 21,309,951
734,000 CMG PLC (United Kingdom) 21,455,145
262,000 Enator AB (Sweden) 6,065,509
136,100 Enator AB 144A (Sweden) 3,150,824
359,450 Merkantildata ASA (Norway) 2,748,721
5 Misys PLC (United Kingdom) 44
916,500 SEMA Group PLC (United Kingdom) 9,075,951
--------------
93,530,713
Computer Software (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
23,600 Formula Systems Ltd. (Israel) (NON) 501,552
690,300 Fuji Soft ABC, Inc. (Japan) 23,733,800
90,000 NIIT Ltd. (India) 2,903,021
44,226 SAP AG (Germany) 18,760,939
--------------
45,899,312
Conglomerates (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,066,700 Power Corporation of Canada (Canada) (NON) 19,074,367
75,202 Preussag AG (Germany) 26,021,063
--------------
45,095,430
Consumer Non Durables (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,103,000 KAO Corp. (Japan) 17,589,907
813,600 Kimberly-Clark de Mexico, S.A. de C.V. Class A (Mexico) 2,021,988
--------------
19,611,895
Consumer Services (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
135,000 Bellsystem 24, Inc. (Japan) 21,232,629
3,702,500 Compass Group PLC (United Kingdom) 34,778,538
--------------
56,011,167
Cosmetics (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
240,200 Hindustan Lever Ltd. (India) 9,526,102
14,292 L'OREAL (France) 6,652,371
--------------
16,178,473
Electric Utilities (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
289,188 Companhia Energetica de Minas Gerais ADR (Brazil) 6,325,988
314,500 Electricidade de Portugal S.A. (Portugal) 7,240,888
--------------
13,566,876
Electronic Components (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
280,900 ASM Lithography Holding N.V. (Netherlands) (NON) 4,523,422
1,555,100 Delta Electronics, Inc. (Taiwan) 4,115,104
1,325,600 Hon Hai Precision Industry (Taiwan) 5,930,317
--------------
14,568,843
Electronics and Electrical Equipment (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,087,000 Compal Electronics Inc. 3,241,930
79,800 JDS Fitel, Inc. (Canada) (NON) 892,174
251,694 Samsung Electronics Co. (South Korea) 6,888,261
--------------
11,022,365
Energy-Related (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
128,800 IHC Caland N.V. (Netherlands) 6,023,810
Financial Services (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
102,100 Aiful Corp. (Japan) 4,705,414
116,873 Housing Development Finance Corporation Ltd. (India) 6,669,594
1,210 Marschollek, Lautenschlaeger und Partner AG (Germany) 608,987
67,700 Shohkoh Fund & Co., Ltd. (Japan) 17,308,817
--------------
29,292,812
Food and Beverages (4.8%)
- --------------------------------------------------------------------------------------------------------------------------
99,150 Danone (France) 26,095,835
410,900 Itoen, Ltd. (Japan) 14,127,508
15,119 Nestle S.A. (Switzerland) 30,172,265
112,700 Panamerican Beverages, Inc. Class A (Mexico) 2,007,469
--------------
72,403,077
Gaming (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,577,000 Berjaya Sports Toto Berhad (Malaysia) 1,113,176
Insurance (6.5%)
- --------------------------------------------------------------------------------------------------------------------------
393,947 Aegon N.V. (Netherlands) 31,258,656
1,392,700 Alleanza Assicurazioni SPA (Italy) 16,315,814
130,100 Liberty Life Association of Africa Ltd. (South Africa) 1,958,093
221,480 Mapfre Vida Seguros (Spain) 8,594,185
1,945,600 Skandia Forsakrings AB (Sweden) 25,243,427
27,027 Zurich Allied AG (Switzerland) (NON) 13,454,746
--------------
96,824,921
Machinery (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
79,442 Mannesmann AG (Germany) 7,282,580
Media (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,762,400 Aegis Group 144A (United Kingdom) 5,400,237
712,700 Gruppo Editoriale L'Espresso SPA (Italy) 5,622,526
--------------
11,022,763
Medical Supplies and Devices (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
333,000 Olympus Optical Co., Ltd. (Japan) 3,651,551
701,000 Terumo Corp. (Japan) 14,384,091
--------------
18,035,642
Networking (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
800,200 Equant N.V. (Netherlands) (NON) 41,321,123
Oil and Gas (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
181,000 MOL Magyar Olaj-es Gazipari GDR (Hungary) 3,439,000
796,523 Sasol Ltd. (South Africa) 3,626,063
135,300 YPF S.A. ADR (Argentina) 3,517,800
--------------
10,582,863
Pharmaceuticals and Biotechnology (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
161,000 Banyu Pharmaceutical Co., Ltd. (Japan) 2,390,856
402,600 Elan Corp. PLC ADR (Ireland) (NON) 29,012,363
362,406 Gehe AG (Germany) 22,799,658
785,500 Glaxo Wellcome PLC (United Kingdom) 23,175,928
1,862,215 Smithkline Beecham PLC ADR (United Kingdom) 20,465,635
1,193,000 Yoshitomi Pharmaceutical Industries, Ltd. (Japan) 11,685,641
--------------
109,530,081
Publishing (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
592,452 VNU N.V. (Netherlands) 24,496,581
162,912 Wolters Kluwer N.V. (Netherlands) 31,316,577
--------------
55,813,158
Restaurants (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,982,900 Autogrill SPA (Italy) 19,730,884
54,628 Sodexho Alliance S.A. (France) 9,516,903
590,200 TelePizza, S.A. (Spain) (NON) 3,955,763
--------------
33,203,550
Retail (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,876,642 Cifra S.A. de C.V. (Mexico) (NON) 3,669,417
873,996 Centros Comerciales Continente, S.A. (Spain) 22,259,947
936,900 La Rinascente SPA (Italy) 8,232,716
3,705,100 Migros Turk T.A.S. (Turkey) 2,675,082
--------------
36,837,162
Semiconductors (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
670,335 Taiwan Semiconductor Manufacturing Co. ADR (Taiwan) (NON) 8,211,604
500 Tokyo Electron Ltd. (Japan) 12,180
--------------
8,223,784
Specialty Consumer Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
337,100 Bodycote International PLC (United Kingdom) 4,094,076
Steel (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
303,900 Gerdau S.A. (Brazil) 2,640,602
Supermarkets (6.7%)
- --------------------------------------------------------------------------------------------------------------------------
578,750 Distribucion y Servicio D&S S.A. ADR (Chile) (NON) 5,787,508
998,114 Koninklijke Ahold N.V. (Netherlands) 29,864,912
56,084 Promodes (France) 34,211,981
1,160,900 Superdiplo S.A. (Spain) (NON) 30,263,332
--------------
100,127,733
Telecommunication Equipment (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
216,000 Matsushita Communication Industrial Co., Ltd. (Japan) 7,742,503
431,700 Nokia OYJ Class A (Finland) 34,338,807
--------------
42,081,310
Telecommunications (7.1%)
- --------------------------------------------------------------------------------------------------------------------------
242,200 BCE, Inc. (Canada) (NON) 6,761,648
1,033,000 Cable & Wireless Communications PLC (United Kingdom) (NON) 7,018,615
757,550 Global TeleSystems Group, Inc. (NON) 25,567,313
436,288 Hellenic Telecommunication Organization S.A. (Greece) 10,483,312
244,086 Helsinki Telephone Corp. (Finland) 10,957,198
115,500 Helsinki Telephone Corp. 144A (Finland) 5,184,879
4,969 Koninklijke KPN N.V. (Netherlands) 153,697
699,400 NetCom Systems AB Class B (Sweden) 23,397,851
1,733,000 Orange PLC ADR (United Kingdom) (NON) 16,631,757
--------------
106,156,270
Telephone Services (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,500 Mahanagar Telephone Nigam Ltd. (India) 11,945
25,665 MobileCom AG (Germany) 6,381,651
171,100 Portugal Telecom S.A. (Portugal) 6,231,178
115,100 Telefonica de Argentina S.A. ADR (Argentina) 3,388,256
126,200 Telefonos de Mexico S.A. ADR Class L (Mexico) 5,584,350
3,374,200 Vodafone Group PLC (United Kingdom) 39,145,572
--------------
60,742,952
Telephone Utilities (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
117,600 Telebras Co. ADR (Brazil) 8,114,400
Transportation (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,804,700 Bombardier, Inc. (Canada) (NON) 19,822,792
--------------
Total Common Stocks (cost $1,448,768,467) $1,461,739,842
SHORT-TERM INVESTMENTS (2.0%) (cost $29,966,536)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$29,962,000 Interest in $471,473,000 joint repurchase agreement
dated September 30, 1998, with Credit Suisse First Boston
due October 1, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $29,966,536 for an
effective yield of 5.45% $ 29,966,536
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,478,735,003) (b) $1,491,706,378
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,498,174,396.
(b) The aggregate identified cost on a tax basis is $1,490,358,615, resulting in gross unrealized appreciation and
depreciation of $157,391,107 and $156,043,344, respectively, or net unrealized appreciation of $1,347,763.
(NON) Non-income-producing security.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers.
ADR or GDR after the name of a foreign holding stands for American Depository Receipts or Global Depository
Receipts, respectively, representing ownership of foreign securities on deposit with a domestic custodian bank.
Diversification by Country
Distribution of investments by country of issue at September 30, 1998: (as percentage of Market Value)
Brazil 1.4%
Canada 4.6
Finland 3.4
France 7.6
Germany 7.6
Greece 1.5
India 1.3
Ireland 3.1
Italy 6.2
Japan 10.0
Mexico 1.4
Netherlands 11.6
Portugal 2.4
Spain 4.4
Sweden 6.2
Switzerland 3.5
Taiwan 1.2
United Kingdom 15.7
United States 3.9
Other 3.0
----
Total 100.0%
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,478,735,003) (Note 1) $1,491,706,378
- -----------------------------------------------------------------------------------------------
Foreign currency 8,290,099
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 705,812
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 159,415,875
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 1,218,461
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 4,046
- -----------------------------------------------------------------------------------------------
Total assets 1,661,340,671
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 438,583
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 4,184,031
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 151,015,016
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,894,224
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 626,193
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees 30,248
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 5,286
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,305,791
- -----------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 6,425
- -----------------------------------------------------------------------------------------------
Other accrued expenses 660,478
- -----------------------------------------------------------------------------------------------
Total liabilities 163,166,275
- -----------------------------------------------------------------------------------------------
Net assets $1,498,174,396
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,604,735,182
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
and foreign currency transactions (Note 1) (119,561,687)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 13,000,901
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,498,174,396
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($630,422,412 divided by 58,327,849 shares) $10.81
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $10.81)* $11.47
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($803,785,482 divided by 75,789,214 shares)** $10.61
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($63,966,502 divided by 5,984,412 shares) $10.69
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $10.69)* $11.08
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $1,718,427) $ 21,317,648
- -----------------------------------------------------------------------------------------------
Interest 4,372,364
- -----------------------------------------------------------------------------------------------
Total investment income 25,690,012
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 20,018,125
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 5,627,930
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 52,174
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 24,263
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,927,818
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 9,763,746
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 598,317
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 977
- -----------------------------------------------------------------------------------------------
Reports to shareholders 599,951
- -----------------------------------------------------------------------------------------------
Auditing 6,396
- -----------------------------------------------------------------------------------------------
Legal 15,814
- -----------------------------------------------------------------------------------------------
Postage 576,374
- -----------------------------------------------------------------------------------------------
Other 493,379
- -----------------------------------------------------------------------------------------------
Total expenses 39,705,264
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (845,681)
- -----------------------------------------------------------------------------------------------
Net expenses 38,859,583
- -----------------------------------------------------------------------------------------------
Net investment loss (13,169,571)
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (111,266,846)
- -----------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 9,085,673
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (2,305,690)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (115,433,985)
- -----------------------------------------------------------------------------------------------
Net loss on investments (219,920,848)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(233,090,419)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment loss $ (13,169,571) $ (10,770,865)
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions (102,181,173) 181,709,608
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies (117,739,675) 64,679,226
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (233,090,419) 235,617,969
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (488,058) (1,892,656)
- ---------------------------------------------------------------------------------------------------------------
Class B -- --
- ---------------------------------------------------------------------------------------------------------------
Class M -- (20,814)
- ---------------------------------------------------------------------------------------------------------------
From return of capital
Class A (42,729) --
- ---------------------------------------------------------------------------------------------------------------
Class B (54,428) --
- ---------------------------------------------------------------------------------------------------------------
Class M (4,504) --
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (67,614,260) (97,836)
- ---------------------------------------------------------------------------------------------------------------
Class B (86,126,420) (115,551)
- ---------------------------------------------------------------------------------------------------------------
Class M (7,126,729) (10,409)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (138,578,999) 673,113,640
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (533,126,546) 906,594,343
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 2,031,300,942 1,124,706,599
- ---------------------------------------------------------------------------------------------------------------
End of year (including accumulated net investment loss
of $-- and $1,783,266, respectively) $1,498,174,396 $2,031,300,942
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Jan. 3, 1995+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $13.60 $11.69 $10.29 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) (.04) (.03) .04 .02
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments (1.63) 1.98 1.37 1.77
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.67) 1.95 1.41 1.79
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.01) (.04) (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.11) --(d) --(d) --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital --(d) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.12) (.04) (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.81 $13.60 $11.69 $10.29
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(b) (12.37) 16.74 13.76 21.06*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) 630,422 $859,999 $499,396 $15,137
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.75 1.75 1.95(e) 1.23(e)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
(loss) to average net assets (%) (.30) (.24) .34 .86*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 170.28 141.29 24.69 9.24*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income (loss) has been determined on the basis of the
weighted average number of shares outstanding during the period.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets includes amounts paid through expense
offset and brokerage service arrangements (Note 2).
(d) Per share distributions were less than $.01 per share, variances may occur due to rounding.
(e) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation,
expenses for the fund reflect a reduction of less than $0.01 and $0.02 per share for each share
class for periods ended September 30, 1996 and 1995, respectively.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 21, 1995+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $13.45 $11.61 $10.28 $10.25
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) (.13) (.13) (.05) (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments (1.60) 1.97 1.39 .04
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.73) 1.84 1.34 .03
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- -- (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.11) --(d) --(d) --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital --(d) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.11) -- (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.61 $13.45 $11.61 $10.28
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(b) (12.98) 15.87 13.02 .29*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) 803,785 $1,079,912 $573,129 $7,053
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 2.50 2.50 2.72(e) .83(e)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
(loss) to average net assets (%) (1.05) (.99) (.43) (.20)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 170.28 141.29 24.69 9.24*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income (loss) has been determined on the basis of the
weighted average number of shares outstanding during the period.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets includes amounts paid through expense
offset and brokerage service arrangements (Note 2).
(d) Per share distributions were less than $.01 per share, variances may occur due to rounding.
(e) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation,
expenses for the fund reflect a reduction of less than $0.01 and $0.02 per share for each share
class for periods ended September 30, 1996 and 1995, respectively.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 21, 1995+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $13.51 $11.64 $10.29 $10.25
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) (.10) (.10) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments (1.61) 1.98 1.38 .04
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.71) 1.88 1.36 .04
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.01)(d) (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.11) -- (d) -- (d) --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital --(d) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.11) (.01) (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.69 $13.51 $11.64 $10.29
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(b) (12.76) 16.12 13.22 .39*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) 63,967 $91,390 $52,182 $1,259
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 2.25 2.25 2.46(e) .79(e) *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
(loss) to average net assets (%) (.80) (.74) (.17) (.15)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 170.28 141.29 24.69 9.24*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income (loss) has been determined on the basis of the
weighted average number of shares outstanding during the period.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets includes amounts paid through expense
offset and brokerage service arrangements (Note 2).
(d) Per share distributions were less than $.01 per share, variances may occur due to rounding.
(e) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation,
expenses for the fund reflect a reduction of less than $0.01 and $0.02 per share for each share
class for periods ended September 30, 1996 and 1995, respectively.
</TABLE>
Notes to financial statements
September 30, 1998
Note 1
Significant accounting policies
Putnam International New Opportunities Fund (the "fund") is a series of
Putnam Investment Funds (the "Trust") which is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The objective of the fund is to seek
long-term capital appreciation by investing primarily in common stocks
that offer potential for capital appreciation and are primarily traded in
security markets outside the United States.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 5.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.50% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over-the-counter -- the last reported bid price.
Short-term investments having remaining maturities of 60 days or less are
stated at amortized cost, which approximates market value, and other
investments are stated at fair market value following procedures approved
by the Trustees. 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) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
F) 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.
G) 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
September 30, 1998, the fund had no borrowings against the line of credit.
H) 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 September 30, 1998, the fund had a capital loss carryover of
approximately $20,068,000 available to offset future net capital gain, if
any, which will expire on September 30, 2006.
I) 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 transaction, foreign currency gains and losses, 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 September 30, 1998, the fund reclassified $15,440,895 to
decrease accumulated net investment loss and $2,886,619 to increase
paid-in-capital, with an increase to accumulated net realized loss on
investments of $18,327,514. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
J) 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.
K) 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 $6,425. These expenses are being amortized on
projected net asset levels over a five-year period. The fund will
reimburse Putnam Management for the payment of these expenses.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 1.20% of the first $500
million of average net assets, 1.10% of the next $500 million, 1.05% of
the next $500 million, 1.00% of the next $5 billion, 0.975% of the next $5
billion, 0.955% of the next $5 billion, 0.94% of the next $5 billion,
0.93% thereafter.
As part of the subcustodian contract between the subcustodian bank and
Putnam Fiduciary Trust Company (PFTC), Inc. the subcustodian bank has a
lien on the securities of the fund to the extent permitted by the fund's
investment restrictions to cover any advances made by the subcustodian
bank for the settlement of securities purchased by the fund. At September
30, 1998, the payable to the subcustodian bank represents the amount due
for cash advance for the settlement of a security purchased.
The fund reimburses Putnam Management 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, a
subsidiary of Putnam Investments, Inc. Investor servicing agent functions
are provided by Putnam Investor Services, a division of PFTC.
For the year ended September 30, 1998, fund expenses were reduced by
$845,681 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 $2,270
has been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved payment by the fund to an annual
rate of 0.25%, 1.00% and 0.75% of the average net assets attributable to
class A, class B and class M shares respectively.
For the year ended September 30, 1998 Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $425,591 and $26,662 from the sale
of class A and class M shares, respectively and $1,994,718 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended September 30, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received $65,372 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended September 30, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$2,957,653,930 and $3,199,962,984, 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 September 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 40,891,158 $500,905,060
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,841,168 63,668,753
- -----------------------------------------------------------------------------
46,732,326 564,573,813
Shares
repurchased (51,641,648) (632,786,272)
- -----------------------------------------------------------------------------
Net decrease (4,909,322) $(68,212,459)
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 80,897,399 $1,046,929,224
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 154,879 1,833,744
- -----------------------------------------------------------------------------
81,052,278 1,048,762,968
Shares
repurchased (60,533,499) (792,875,227)
- -----------------------------------------------------------------------------
Net increase 20,518,779 $ 255,887,741
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 14,865,732 $179,189,819
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestments of
distributions 6,548,440 70,395,732
- -----------------------------------------------------------------------------
21,414,172 249,585,551
Shares
repurchased (25,911,310) (309,930,505)
- -----------------------------------------------------------------------------
Net decrease (4,497,138) $(60,344,954)
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 41,621,976 $525,008,380
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestments of
distributions 7,867 92,671
- -----------------------------------------------------------------------------
41,629,843 525,101,051
Shares
repurchased (10,714,741) (136,384,138)
- -----------------------------------------------------------------------------
Net increase 30,915,102 $388,716,913
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,786,653 $ 21,841,612
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 572,123 6,190,375
- -----------------------------------------------------------------------------
2,358,776 28,031,987
Shares
repurchased (3,137,394) (38,053,573)
- -----------------------------------------------------------------------------
Net decrease (778,618) $(10,021,586)
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,840,971 $48,824,959
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,144 25,331
- -----------------------------------------------------------------------------
3,843,115 48,850,290
Shares
repurchased (1,563,309) (20,341,304)
- -----------------------------------------------------------------------------
Net increase 2,279,806 $28,508,986
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
For the year ended September 30, 1998, a portion of the fund's
distribution represents a return of capital and is therefore not taxable
to shareholders.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Robert J. Swift
Vice President and Fund Manager
Jack P. Chang
Vice President and Fund Manager
Deborah Farrell
Vice President and Fund Manager
Stephen Oler
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
New Opportunities Fund. It may also be used as sales literature when
preceded or accompanied by the current prospectus, which gives details of
sales charges, investment objectives, and operating policies of the fund,
and the most recent copy of Putnam's Quarterly Performance Summary. For
more information or to request a prospectus, call toll free:
1-800-225-1581. You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
AN010-47006 539/2AH/2AI 11/98
