Putnam
Emerging
Markets
Fund
SEMIANNUAL REPORT
February 28, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The economic center of gravity is shifting from the developed to
the developing countries."
-- Financial Times, January 30, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
19 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
By their very nature, the financial markets of emerging economies tend toward
volatility. Governments may be less stable, economies less secure, and
infrastructures less sophisticated than those of more developed nations. For
patient investors, however, a portfolio of emerging-markets securities can
prove to be extremely satisfying over the long term.
It is important for shareholders of Putnam Emerging Markets Fund to focus on
the need for a long-term investment horizon as they review the fund's
performance for the first half of fiscal 1998. While the fund's results at net
asset value were negative for the period, they were competitive and
significantly more favorable than those of the index against which the fund is
judged.
Furthermore, in the turmoil that swept the global equities markets following
the economic and currency troubles of some Asian countries, the emerging
markets were among those most severely affected. While more volatility seems
probable over the near term, as the emerging markets continue to gain a
greater share of the world's productivity, their prospects are sure to grow
increasingly brighter.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
April 15, 1998
Report from the Fund Managers
Thomas R. Haslett
J. Peter Grant
Deborah S. Farrell
Stephen Oler
Carmel Peters
Intense volatility was once again the catch phrase associated with the world's
emerging markets during the past six months. Although the level of volatility
associated with this asset class has continued to sway investors'
decision-making at the close of Putnam Emerging Markets Fund's semiannual
period on February 28, 1998, the implications of the Asian financial crisis
had become clearer and investment opportunities were beginning to appear.
Within this environment, your fund's results, although negative for the
period, were well ahead of the results of its benchmark index, the Morgan
Stanley Capital International Emerging Markets Free Index. For the semiannual
period, the fund had a -9.89% total return at net asset value (-15.09% at
public offering price) compared with the -13.73% return of the index. For
more performance information, please turn to page 9.
* DISCIPLINED, LONG-TERM INVESTMENT APPROACH
Before discussing in any detail developments in the emerging markets and your
fund's strategy, we would like to inform new shareholders (and remind existing
shareholders) about the investment philosophy behind your fund. The fund's
focus is on achieving long-term capital appreciation by investing in the
developing markets of Latin America, emerging Europe/Middle East/Africa, and
Asia. We believe investing in emerging-markets equities benefits from the
combination of a broad top-down analysis of regions and countries as well as
bottom-up, stock-by-stock analysis of companies.
Our country selection combines both quantitative and qualitative elements to
arrive at what we believe is a superior mix. This analysis helps us manage
some of the risks the fund can incur in pursuing its goals. We then focus on
stock selection within these markets. In our process of stock selection, we
generally look for companies with a large difference between their share
prices and the underlying economic value of the companies. We also seek
companies that are uniquely positioned within their markets and offer
attractive valuations relative to others in their industries.
* ASIA STABILIZES BUT REMAINS A CONCERN
The start of 1998 brought some relief from the stock and currency
deterioration in Asia that dominated the second half of 1997. Some countries,
such as Thailand and South Korea, even managed significant rebounds from their
depressed levels as their leadership appeared to embrace the reforms set out
as conditions of International Monetary Fund assistance. Others, such as
Indonesia, delayed implementation of reforms by seeking alternative measures.
By the end of February, it appeared that Japan would not be able to provide
economic leadership in Asia as a result of its own economic problems -- thus
putting off a sustained recovery in the region for some time. Additionally, in
the face of a slowing economy, an export-oriented China continued to have a
detrimental effect on the competitive positions of other Asian exporters.
Over the past six months, the fund remained underweighted in Asia. We believe
the region's stock markets, currencies, and interest rates will remain
volatile for the near future. Nevertheless, we are cautiously evaluating
several undervalued investment opportunities. In general, we are looking for
resilient companies with the ability to generate cash flows and to grow their
market shares.
[GRAPHIC OMITTED: horizontal bar chart COUNTRY ALLOCATION]
COUNTRY ALLOCATION*
Brazil 14.3%
Mexico 12.0%
South Africa 6.9%
Taiwan 6.8%
India 6.6%
Argentina 6.4%
South Korea 5.2%
Footnote reads:
*Based on net assets as of 2/28/98. Holdings will vary over time.
Resorts World of Malaysia (sold prior to the end of the period) exemplified
many of the qualities we looked for. This gaming company, which operates a
resort within driving distance of the Malaysian capital, Kuala Lumpur, offered
strong cash flow and a seasoned management.
We have also begun to focus some resources on markets such as Taiwan, the
Philippines, and India that were relatively unscathed by Asia's problems. In
particular, Taiwan now offers a competitive advantage over the West in the
more commodity-related areas of information technology.
* LATIN AMERICA: OUTSTANDING 1997, SLOWER START TO 1998
Most Latin American markets enjoyed a robust 1997 as inflation rates fell,
economic growth surged, and foreign investment was strong. As Asia's problems
set in, however, investors became concerned about where the so-called Asian
contagion would hit next. One country under scrutiny was Brazil, where fiscal
and current account deficits forced the government to raise interest rates and
restrict spending. Falling commodity prices as a result of the Asian crisis --
particularly oil -- and the loss of competitiveness to Asian manufacturers
also raised warning flags to investors.
While we don't dispute some of the economic data coming from Latin America, we
believe that the region as a whole has been hurt by the higher risk premium
now placed on emerging markets around the world. Additionally shareholders
should keep in mind that the Latin American markets were world leaders in
1997, and therefore, there is always the potential for profit taking -- which
can put downward pressure on prices as investors sell their shares. The fund
has thus remained overweighted in Latin America with an emphasis on countries
with stronger relative positions such as Mexico and Argentina and with less of
a focus on economically weaker countries such as Chile.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Companhia Brasileira de Distribuicao Grupo Pao de Acucar ADR
Food and beverages
Companhia Vale do Rio Doce ADR
Metals and mining
PanAmerican Beverages, Inc. Class A
Food and beverages
Grupo Televisa S.A. GDR
Broadcasting
Companhia Energetica do Minas Gerais S.A. (Cemig) ADR
Utilities
YPF S.A. ADR
Oil and gas
Tatneft ADR
Oil and gas
Telebras Co. ADR
Utilities
Kredyt Bank S.A. GDR
Insurance and finance
First National Bank Holdings Ltd.
Insurance and finance
Footnote reads:
These holdings represent 19.3% of the fund's net assets as of 2/28/98.
Portfolio holdings will vary over time.
For example, we believe that strong consumer spending in Mexico has benefited
Femsa, one of the largest Coca-Cola bottlers in Latin America and a major beer
exporter. The company continues to build its market share while generating
higher revenues. Femsa's productivity and return on capital employed have also
markedly improved. While this holding, along with others discussed in this
report, was viewed favorably at the end of the fiscal period, all are subject
to review and adjustment in accordance with the fund's investment strategy and
may vary in the future.
* DECLINE ON RUSSIAN FRONT; LOW COMMODITY PRICES HURT SOUTH AFRICA
The Russian market's 112% return in 1997 masked several fundamental problems
and became a precursor to negative returns early in 1998. Liquidity in that
market began to disappear as the country's fiscal difficulties pushed interest
rates higher. President Boris Yeltsin's health as well as the sacking of some
high-profile ministers spooked the equity market further. Fortunately your
fund maintains a relatively small position in Russia compared with the
positions of its peers.
The fund's South African holdings were also hurt by market-wide problems. Low
gold and oil prices as well as a weak currency have had a negative impact on
South African companies. One energy company in the fund, Sasol, reported
weaker earnings based on oil prices and a loss of tariff protection on its
oil-from-coal products. We are hopeful for Sasol's future, however, as the
company cuts costs through new technology, focuses on more profitable
businesses, and pushes forward with international expansion.
* OUTLOOK: NEAR-TERM UNCERTAINTY, MORE OPTIMISTIC FUTURE
We expect that the world's emerging markets will continue to experience a
significant level of volatility in the months ahead as the Asian currencies
find an equilibrium and interest rates stabilize or fall. Additionally any
negative surprises in developed markets could raise the perceived risk of
emerging markets even farther than now.
On a positive note, global liquidity is high and interest rates in many parts
of the world are low -- factors that are usually beneficial to equities.
Moving through this period of uncertainty, we will continue to look for
undervalued investment opportunities, specifically emerging-markets companies
with strong balance sheets, time-tested managements, and export
competitiveness.
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 2/28/98, there is no guarantee the fund will continue to hold
these securities in the future.
International investing involves certain risks, such as currency fluctuations,
economic instability, and political developments, not present with domestic
investments. Additional risks, including illiquidity, and volatility, may be
associated with emerging-markets securities.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Emerging Markets Fund is designed for investors seeking capital
appreciation through common stocks of companies operating primarily in
developing economies.
TOTAL RETURN FOR PERIODS ENDED 2/28/98
Class A Class B Class M
(inception date) (12/28/95) (10/30/96) (10/30/96)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months -9.89% -15.09% -10.14% -14.53% -10.03% -13.14%
- ------------------------------------------------------------------------------
1 year -14.50 -19.40 -15.06 -19.22 -14.88 -17.87
- ------------------------------------------------------------------------------
Life of fund 17.50 10.73 15.72 12.72 16.23 12.16
Annual average 7.71 4.81 6.96 5.67 7.18 5.43
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 2/28/98
MSCI Emerging Markets Consumer
Free Index Price Index
- ------------------------------------------------------------------------------
6 months -13.73% 0.68%
- ------------------------------------------------------------------------------
1 year -19.22 1.44
- ------------------------------------------------------------------------------
Life of fund -4.59 5.47
Annual average -2.15 2.49
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 3/31/98
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months -10.95% -16.08% -11.37% -15.70% -11.18% -14.29%
- ------------------------------------------------------------------------------
1 year -7.44 -12.76 -8.19 -12.68 -7.91 -11.10
- ------------------------------------------------------------------------------
Life of class 23.23 16.13 21.18 18.18 21.81 17.54
Annual average 9.68 6.84 8.87 7.67 9.12 7.41
- ------------------------------------------------------------------------------
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-, 5-, and 10-year (where available) 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 and represent past
performance; they do not guarantee future results. 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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 2/28/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 1 1 1
- ------------------------------------------------------------------------------
Income -- -- --
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term $0.052 $0.052 $0.052
- ------------------------------------------------------------------------------
Short-term 0.151 0.151 0.151
- ------------------------------------------------------------------------------
Total $0.203 $0.203 $0.203
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
8/31/97 $10.94 $11.61 $10.87 $10.89 $11.28
- ------------------------------------------------------------------------------
2/28/98 9.64 10.23 9.55 9.58 9.93
- ------------------------------------------------------------------------------
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 maximum 5.75% 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
Morgan Stanley Capital International (MSCI) Emerging Markets Free Index is
an unmanaged list of equity securities from emerging markets with all
values expressed in U.S. dollars. The index assumes reinvestment of all
distributions and interest payments and does not take in 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.
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Portfolio of investments owned
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (95.9%) *
NUMBER OF SHARES VALUE
Argentina (6.4%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
91,824 Banco Frances del Rio de la Plata S.A. ADR $ 914,197
135,000 Cia Naviera Perez Co. + 888,833
22,700 Inversiones Y Representaciones S.A. IRSA GDR 791,663
37,400 Telefonica de Argentina S.A. ADR 1,346,400
50,300 YPF S.A. ADR 1,590,738
--------------
5,531,831
Brazil (15.7%)
- ------------------------------------------------------------------------------------------------------------
40,042 Banco Bradesco S.A. ADR 340,208
2,050 Banco Itau S.A. 1,211,995
26,000 Brazil Realty S.A. 144A GDR + 578,500
7,400 Centrais Eletricas de Santa Catarina S.A. 144A GDR + 717,800
94,000 Companhia Brasileira de Distribuicao Grupo Pao
de Acucar ADR + 2,162,000
1,300 Companhia Cimento Portland Itau + 294,539
2,100 Companhia de Saneamento Basico de Estado
de Sao Paulo 435,835
38,700 Companhia Energetica do Minas Gerais S.A.
(Cemig) ADR 1,654,425
87,800 Companhia Vale do Rio Doce ADR 1,887,700
15,100 Companhia Siderurgica Nacional 391,566
11,200 Empresa Nacional de Compercio, Redito E
Participacoes S.A. (ENCOPAR) 159,600
16,200 Gerdau S.A. 258,076
63,500 Lojas Americanas S.A. + 399,018
40,000 Madeco S.A. ADR (DC) 640,000
23,000 Petroleo Brasileiro S.A.-Petrobras ADR + 514,625
48,700 Souza Cruz S.A. + 424,546
12,600 Telebras Co. ADR + 1,542,713
--------------
13,613,146
Canada (1.4%)
- ------------------------------------------------------------------------------------------------------------
25,800 Bell Canada International, Inc. +(DC) 464,400
106,600 Hurricane Hydrocarbons Ltd. (DC) 749,016
--------------
1,213,416
Chile (0.7%)
- ------------------------------------------------------------------------------------------------------------
42,800 Distribucion y Servicio D&S S.A. ADR + 652,700
Hong Kong (4.3%)
- ------------------------------------------------------------------------------------------------------------
172,000 Asia Satellite Telecommunications Holdings Ltd. 317,696
640,000 Beijing Datang Power Generation Co., Ltd. + 326,531
123,000 Cheung Kong Infrastructure Holdings 378,914
138,000 Dao Heng Bank Group Ltd. 395,712
326,000 Guangdong Kelon Elec. Holding 364,234
16,000 Johnson Electric Holdings Ltd. 56,833
8,800 Huaneng Power International, Inc. ADR + 216,700
188,000 New World Infrastructure Ltd. + 497,804
260,000 NgFung Hong Ltd. 275,381
649,000 Qingling Motors Co. + 259,868
110,000 Shanghai Industrial Holdings Ltd. 477,396
650,000 Tingyi Holding Corp. + 73,883
27,000 VTech Holdings Ltd. 94,162
--------------
3,735,114
Hungary (1.0%)
- ------------------------------------------------------------------------------------------------------------
68,250 Pick Szeged Rt. GDR 144A 887,250
India (6.6%)
- ------------------------------------------------------------------------------------------------------------
55,000 Bharat Heavy Electricals Ltd. (BHEL) 447,837
27,400 BSES Ltd. GDR + 564,440
111,000 Gujarat Ambuja Cements Ltd. GDR 818,625
26,900 Hindalco Industries Ltd. + 531,208
30,000 Hindustan Petroleum Corp. Ltd. GDR + 353,435
15,000 Indian Hotels, Ltd. 144A GDR + 281,250
40,000 Larsen & Toubro Ltd. + 230,840
20,000 Larsen & Toubro Ltd. GDR + 230,546
92,000 Mahanagar Telephone Nigam Ltd. 610,524
20,000 Ranbaxy Laboratories Ltd. 348,346
16,000 Ranbaxy Laboratories GDR Ltd. 420,000
30,600 State Bank of India GDR + 589,050
50,000 Tata Engineering and Locomotive Co., Ltd. GDR + 316,158
--------------
5,742,259
Indonesia (1.0%)
- ------------------------------------------------------------------------------------------------------------
261,500 PT Astra Argo Niaga Lestari Tbk 144A + 101,937
54,000 PT Astra Argo Niaga Lestari Tbk + 21,050
55,500 PT Hanjaya Mandala Sampoerna + 31,982
1,000,000 PT Indah Kiat Pulp & Paper Corp. + 220,331
445,000 PT Indorama Synthetics + 125,701
119,000 PT Indosat 171,098
330,000 PT Semen Gresik + 204,145
--------------
876,244
Israel (3.2%)
- ------------------------------------------------------------------------------------------------------------
494,000 Bank Leumi Le-Israel + 838,761
204,800 Supersol Ltd. 661,143
25,000 Supersol Ltd. ADR 393,750
22,500 Tadiran Ltd. 891,605
--------------
2,785,259
Malaysia (4.9%)
- ------------------------------------------------------------------------------------------------------------
292,000 Berjaya Sports Toto Berhad 817,283
1,260,000 IJM Corp. Berhad 653,967
24,000 IOI Corp. Berhad 20,348
203,000 KFC Holdings BHD + 344,769
242,000 Malakoff Berhard 647,745
55,000 Malaysian Assurance Alliance + 110,598
725,000 PPB Oil Palms Berhad + 658,016
102,000 Star Publications 184,321
115,000 Telekom Malaysia + 390,625
206,000 MNI Holdings BHD 419,837
--------------
4,247,509
Mexico (12.0%)
- ------------------------------------------------------------------------------------------------------------
209,000 Cifra S.A. de CV + 404,168
385,300 Corporacion Moctezuma, S.A. de C.V. + 497,336
182,000 Corporativo Fragua, SA + 256,278
157,500 Fomento Economico Mexicano, S.A. de C.V. Class B (Femsa)+ 1,173,580
40,500 Grupo Accion, S.A. de C.V. 144A ADR + 334,125
288,000 Grupo Financiero Banamex Accival, S.A. de C.V. Class B + 724,900
47,200 Grupo Imsa S.A. de C.V. ADR + 899,750
47,600 Grupo Televisa S.A.GDR + 1,666,000
288,000 Kimberly-Clark de Mexico, S.A. de C.V. Class A 1,307,862
51,000 PanAmerican Beverages, Inc. Class A 1,858,313
26,200 Telefonos de Mexico S.A. ADR Class L 1,328,013
--------------
10,450,325
Philippines (3.6%)
- ------------------------------------------------------------------------------------------------------------
1,608,200 Ayala Land, Inc. Class B 812,222
3,792,300 Belle Corp. + 168,547
24,000 Benpres Holdings Corp. 144A GDR (non) 69,600
60,000 Benpres Holdings Corp. GDR + 177,000
3,307,300 International Container Terminal Services, Inc. + 492,754
10,300 Philippine Long Distance ADR 279,609
21,600 Philippine Long Distance Telephone Co. ADR 569,700
2,700,000 SM Prime Holdings, Inc. + 504,546
571,800 Solid Group, Inc. + 22,237
--------------
3,096,215
Poland (2.2%)
- ------------------------------------------------------------------------------------------------------------
33,000 @Entertainment, Inc. + 363,000
7,600 Bank Handlowy 144A + 120,184
80,200 Kredyt Bank S.A. GDR + 1,453,625
--------------
1,936,809
Portugal (3.4%)
- ------------------------------------------------------------------------------------------------------------
56,500 Colep-Companhia Portuguesa de Embalagens + 816,787
18,000 Electricidade de Portugal S.A. + 381,701
41,900 Investec Consultoria Internacional S.A. + 1,409,445
2,700 Telecel-Comunicacaoes Pessoais, S.A. + 351,000
--------------
2,958,933
Russia (4.2%)
- ------------------------------------------------------------------------------------------------------------
15,700 Lukoil Holding ADR + 1,083,300
13,600 Tatneft ADR + 1,543,600
3,700,000 Unified Energy Systems + 1,022,125
--------------
3,649,025
South Africa (6.9%)
- ------------------------------------------------------------------------------------------------------------
225,000 Billiton PLC 557,381
22,000 Energy Africa Ltd. + 357,500
200,000 Engen Ltd. 711,830
127,500 First National Bank Holdings Ltd. 1,441,304
45,000 Liberty Life Association of Africa Ltd. 1,365,015
401,200 Lonrho PLC 624,720
106,500 Sasol Ltd. 908,857
--------------
5,966,607
South Korea (5.2%)
- ------------------------------------------------------------------------------------------------------------
80,000 Daewoo Heavy Industries 417,903
200 Hansol Paper Co. 1,275
35,200 Housing & Commercial Bank GDR 259,600
56,700 Kookmin Bank 361,544
69,600 Korea Electric Power Corp. + 930,275
26,010 L.G. Electronics + 392,302
5,700 Pohang Iron & Steel Company, Ltd. + 358,439
16,000 Samsung Electronics 144A GDR + 927,037
45,000 Samsung Heavy Industries + 300,735
17,600 Samsung Electro-Mechanics Co. + 360,416
527 SK Telecom Co., Ltd. 251,512
--------------
4,561,038
Taiwan (6.8%)
- ------------------------------------------------------------------------------------------------------------
198,250 Acer, Inc. + 481,642
20,000 Ase Test Limited + 1,015,000
36,000 Asustek Computer, Inc. + 846,395
185,000 Aurora Corp. + 461,050
591,480 Bank Sinopac + 443,146
119,800 Delta Electronics, Inc. + 634,677
110,000 Hon Hai Precision Industry + 768,965
30,000 Siliconware Precision Industries Co. GDR + 540,000
139,000 Taiwan Semiconductor Manufacturing Co. + 727,680
--------------
5,918,555
Thailand (2.4%)
- ------------------------------------------------------------------------------------------------------------
51,300 Advanced Info Service Public Co., Ltd. + 390,404
137,000 Bangkok Bank Public Co., Ltd. 467,262
173,300 Electricity Generating Public Co. Ltd. + 454,360
32,000 Industrial Finance Corp. of Thailand (The) + 21,531
29,800 PTT Exploration & Production PLC + 387,193
197,400 TelecomAsia Corporation Public Co., Ltd. + 114,501
170,000 Total Access Communication Public Co., Ltd. + 246,500
--------------
2,081,751
Turkey (2.3%)
- ------------------------------------------------------------------------------------------------------------
10,500,000 Dogan Sirketler Grubu Holding A.S. + 345,536
60,000 Haci Omer Sabanci Holdings ADR + 810,000
25,500 Yapi ve Kredi Bankasi A.S. GDR + 841,500
--------------
1,997,036
United Kingdom (0.8%)
- ------------------------------------------------------------------------------------------------------------
63,000 Ramco Energy PLC ADR +(DC) 763,875
Venezuela (0.9%)
- ------------------------------------------------------------------------------------------------------------
15,500 Compania Anonima Nacional Telefonos
de Venezuela (CANTV) ADR + 549,281
81,000 Sivensa S.A. ADR 218,635
--------------
767,916
--------------
Total Common Stocks (cost $85,043,059) $ 83,432,813
CONVERTIBLE BONDS AND NOTES (1.7%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$950,000 Alfa S.A. 144A cv. sub. notes 8s, 2000 (Mexico) $ 1,197,000
270,000 Mahindra & Mahindra Ltd. 144A cv. bonds 5s, 2001 252,450
--------------
Total Convertible Bonds and Notes (cost $1,532,999) $ 1,449,450
WARRANTS (--) * + (cost $-) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
758,460 Belle Corp. 9/11/00 $ 1,187
SHORT-TERM INVESTMENTS (3.7%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 757,000 Abbey National North America Corp. effective
yield of 5.47%, April 20, 1998 $ 751,249
2,500,000 Interest in $700,000,000 joint repurchase agreement
dated February 27, 1998, with Goldman Sachs
due March 2, 1998, with various U.S. Treasury
obligations -- maturity value of $2,501,175
for an effective yield of 5.64% 2,500,783
--------------
Total Short-Term Investments (cost $3,252,032) $ 3,252,032
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $89,828,090) *** $ 88,135,482
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $86,981,474.
*** The aggregate identified cost on a tax basis is $90,310,986, resulting in gross unrealized
appreciation and depreciation of $8,307,558 and $10,483,062, respectively, or net unrealized
depreciation of $2,175,504.
+ Non-income-producing security.
[DBL DAGGER] Restricted, excluding 144A securities, as to public resale. The total market value of
restricted securities held at February 28, 1998 was $741,409 or less than 0.1% of net assets.
[DC] These securities have exposure in an emerging market country that is different than the
country in which they are domiciled.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers.
ADR and GDR after the name of a foreign holding stands for American Depository Receipts and Global
Depository Receipts respectively, representing ownership of foreign securities on deposit with a domestic
custodian bank.
The fund had the following industry group concentrations greater than 10% at February 28, 1998
(as a percentage of net assets):
Insurance and finance 16.7%
Oil and gas 10.7
Telecommunications 10.7
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at February 28, 1998 (Unaudited)
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Taiwan Dollar $2,752,600 $2,498,094 7/98 $(254,506)
- ----------------------------------------------------------------------------------------
<CAPTION>
Swap Contracts Outstanding at February 28, 1998 (Unaudited)
Notional Termination Unrealized
Amount Date Depreciation
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Agreement with Merrill Lynch, Pierce, Fenner &
Smith, Inc. Dated February 6, 1998 to receive
(pay) the notional amount multiplied by the return
of Cifra S.A. Series V (Mexico) less the notional
amount multiplied by one month LIBOR less 4% [DBL DAGGER] $749,279 8/98 $(7,870)
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
February 28, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $89,828,090) (Note 1) $ 88,135,482
- ---------------------------------------------------------------------------------------------------
Cash 60,536
- ---------------------------------------------------------------------------------------------------
Foreign currency (cost $208,824) 209,258
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 73,056
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 366,986
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 1,190,973
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 3,491
- ---------------------------------------------------------------------------------------------------
Total assets 90,039,782
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 1,791,088
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 649,870
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 172,445
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 77,272
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,489
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 829
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 48,157
- ---------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 3,662
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts (Note 1) 254,506
- ---------------------------------------------------------------------------------------------------
Payable for open swap contracts (Note 1) 7,870
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 51,120
- ---------------------------------------------------------------------------------------------------
Total liabilities 3,058,308
- ---------------------------------------------------------------------------------------------------
Net assets $ 86,981,474
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $101,617,840
- ---------------------------------------------------------------------------------------------------
Accumulated net investment loss (Note 1) (502,119)
- ---------------------------------------------------------------------------------------------------
Distributions in excess of gain on investments
and foreign currency transactions (Note 1) (12,179,697)
- ---------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
and assets and liabilities in foreign currencies (1,954,550)
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $ 86,981,474
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($46,540,486 divided by 4,830,249 shares) $ 9.64
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $9.64)* $10.23
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($36,665,655 divided by 3,840,367 shares)** $ 9.55
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($3,775,333 divided by 394,200 shares) $ 9.58
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $9.58)* $ 9.93
- ---------------------------------------------------------------------------------------------------
* 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
Six months ended February 28, 1998 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $35,299) $ 452,260
- --------------------------------------------------------------------------------------------------
Interest 170,475
- --------------------------------------------------------------------------------------------------
Total investment income 622,735
Expenses:
Compensation of Manager (Note 2) 518,899
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 283,540
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,909
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,051
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 57,630
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 181,810
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 14,274
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 129
- --------------------------------------------------------------------------------------------------
Reports to shareholders 37,718
- --------------------------------------------------------------------------------------------------
Registration fees 2,235
- --------------------------------------------------------------------------------------------------
Auditing 30,328
- --------------------------------------------------------------------------------------------------
Legal 2,571
- --------------------------------------------------------------------------------------------------
Postage 13,371
- --------------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (98,632)
- --------------------------------------------------------------------------------------------------
Total expenses 1,053,833
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (33,495)
- --------------------------------------------------------------------------------------------------
Net expenses 1,020,338
- --------------------------------------------------------------------------------------------------
Net investment loss (397,603)
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (11,700,500)
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (2,809)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the period (233,841)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 2,820,218
- --------------------------------------------------------------------------------------------------
Net loss on investments (9,116,932)
- --------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(9,514,535)
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
February 28 August 31
1998* 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ------------------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------------------
Net investment loss $ (397,603) $ (218,701)
- ------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments
and foreign currency transactions (11,703,309) 1,432,850
- ------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies 2,586,377 (4,883,449)
- ------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (9,514,535) (3,669,300)
- ------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ------------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------------
Class A -- (11,345)
- ------------------------------------------------------------------------------------------------------------
Class B -- (3,758)
- ------------------------------------------------------------------------------------------------------------
Class M -- (372)
- ------------------------------------------------------------------------------------------------------------
From net realized gain on investments
- ------------------------------------------------------------------------------------------------------------
Class A (927,370) (90,004)
- ------------------------------------------------------------------------------------------------------------
Class B (762,785) (34,401)
- ------------------------------------------------------------------------------------------------------------
Class M (76,991) (3,163)
- ------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 6,595,200 92,555,524
- ------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (4,686,481) 88,743,181
Net assets
- ------------------------------------------------------------------------------------------------------------
Beginning of period 91,667,955 2,924,774
- ------------------------------------------------------------------------------------------------------------
End of period (including accumulated net investment
loss and distributions in excess of net investment
income of $502,119 and $104,516, respectively) $86,981,474 $91,667,955
- ------------------------------------------------------------------------------------------------------------
* Unaudited
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
- --------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share February 28 Year ended Dec. 28, 1995+
operating performance (Unaudited) August 31 to August 31
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $10.94 $10.28 $8.50
- --------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (c) (.03) (.02)(d) .01(d)
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.07) .81 1.77
- --------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.10) .79 1.78
- --------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.01) --
- --------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.20) (.12) --
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.13) --
- --------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.64 $10.94 $10.28
- --------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (9.89)* 7.82 20.94*
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $46,540 $49,581 $2,925
- --------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.04* 2.10 1.25*
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(c) (.29)* (.23) .11*
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 43.72* 141.81 45.90*
- --------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid $.0044 $.0109 $.0060
- --------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid through expense offset
arrangements. (Note 2)
(c) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation,
expenses for the fund reflect a reduction of $.09 per share for class A for the period ended August
31, 1996. Expenses for the period ended August 31, 1997 reflect a reduction of $.04, $.03 and $.03 per
share for class A, class B and class M, respectively. Expenses for the period ended February 28, 1998
reflect a reduction of $.01, $.01 and $.01 per share for class A, Class B and Class M, respectively.
(d) Per share net investment income (loss) has been determined on the basis of the weighted average
number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- -------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share February 28 Oct. 30, 1996+
operating performance (Unaudited) to August 31
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $10.87 $9.95
- -------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (c) (.06) (.09)(d)
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.06) 1.14
- -------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.12) 1.05
- -------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.01)
- -------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.20) (.12)
- -------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.13)
- -------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.55 $10.87
- -------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (10.14)* 10.67*
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $36,666 $38,044
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.42* 2.39*
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(c) (.66)* (.76)*
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 43.72* 141.81
- -------------------------------------------------------------------------------------------------------------------
Average commission
rate paid $.0044 $.0109
- -------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid through expense offset
arrangements. (Note 2)
(c) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation,
expenses for the fund reflect a reduction of $.09 per share for class A for the period ended August
31, 1996. Expenses for the period ended August 31, 1997 reflect a reduction of $.04, $.03 and $.03 per
share for class A, class B and class M, respectively. Expenses for the period ended February 28, 1998
reflect a reduction of $.01, $.01 and $.01 per share for class A, Class B and Class M, respectively.
(d) Per share net investment income (loss) has been determined on the basis of the weighted average
number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ----------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share February 28 Oct. 30, 1996+
operating performance (Unaudited) to August 31
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $10.89 $9.95
- ----------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (c) (.05) (.07)(d)
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.06) 1.14
- ----------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.11) 1.07
- ----------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.01)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.20) (.12)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.13)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.58 $10.89
- ----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (10.03)* 10.88*
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,775 $4,043
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) (c) 1.29* 2.18*
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) (c) (.54)* (.53)*
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 43.72* 141.81
- ----------------------------------------------------------------------------------------------------------------------
Average commission
rate paid $.0044 $.0109
- ----------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid through expense offset
arrangements. (Note 2)
(c) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation,
expenses for the fund reflect a reduction of $.09 per share for class A for the period ended August
31, 1996. Expenses for the period ended August 31, 1997 reflect a reduction of $.04, $.03 and $.03 per
share for class A, class B and class M, respectively. Expenses for the period ended February 28, 1998
reflect a reduction of $.01, $.01 and $.01 per share for class A, Class B and Class M, respectively.
(d) Per share net investment income (loss) has been determined on the basis of the weighted average
number of shares outstanding during the period.
</TABLE>
Notes to financial statements
February 28, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam Emerging Markets (the "fund") is one of a series of Putnam Investment
Funds (the "Trust") which is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company.
The objective of the fund is to seek long-term capital appreciation by
investing in common stocks and other equity securities of emerging market
companies.
The fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 5.75%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.50% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in case of some
securities traded over-the-counter -- the last reported bid price. Investments
for which market quotations are not readily available (and in certain
circumstances debt securities which trade on an exchange) are stated at fair
value on the basis of valuations furnished by pricing services approved by the
Trustees, which determines valuations for institutional size trading units of
such securities using methods based on market transactions for comparable
securities and various relationships between securities that are generally
recognized by institutional traders. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which approximates
market value, and other investments are stated at fair market value following
procedures approved by the Trustees. Foreign securities quoted in foreign
currencies are translated into U.S. dollars at the current exchange rate.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, other assets and liabilities are recorded in the books and records
of the fund after translation to U.S. dollars based on the exchange rates on
that day. The cost of each security is determined using historical exchange
rates. Income and withholding taxes are translated at prevailing exchange
rates when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the foreign
exchange rate on investments from fluctuations arising from changes in the
market prices of the securities. Such gains and losses are included with the
net realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign currencies
and the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized appreciation and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using current forward currency
exchange rates supplied by a quotation service. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract
is "marked to market" daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The fund could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet the
terms of their contracts or if the fund is unable to enter into a closing
position.
G) Swap contracts The fund may engage in emerging market swap contracts, which
involve a commitment by one party to make payments based on the terms of the
contract in exchange for a market linked return based on a notional amount.
The fund enters into the swap contracts to increase its exposure to different
underlying instruments and to gain access to markets that might be unavailable
to foreign investors or only accessible at a high excess premium.
The potential risk to the fund would be the nonperformance by the other party
involved in the swap contract. The loss incurred by the failure of the
counterparty is limited to the amount of the original investment. In addition,
losses may arise from changes in the value of the underlying securities.
H) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the six months ended February 28, 1998, the
fund had no borrowings against the line of credit.
I) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
J) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital
gain distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. 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.
K) Expenses of the trust Expenses directly charged or attributable to any fund
will be paid from the assets of that fund. Generally, expenses of the trust
will be allocated among and charged to the assets of each fund on a basis that
the Trustees deem fair and equitable, which may be based on the relative
assets of each fund or the nature of the services performed and relative
applicability to each fund.
L) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public offering of
its shares were $3,662. These expenses are being amortized on projected net
asset levels over a five-year period. The fund will reimburse Putnam
Management for the payment of these expenses.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 1.20% of the first $500 million of
average net assets, 1.10% of the next $500 million, 1.05% of the next $500
million, 1.00% of the next $5 billion, 0.975% of the next $5 billion, 0.955%
of the next $5 billion, 0.94% of the next $5 billion, and 0.93% thereafter.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through August 31, 1998, to the extent that
expenses of the fund (exclusive of brokerage commissions, interest, taxes,
deferred organizational and extraordinary expense, credits from Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. and
payments under the Trust's distribution plan) would exceed an annual rate of
1.85% of the fund's average net assets.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the six months ended February 28, 1998, fund expenses were reduced by
$33,495 under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these credits.
The fund could have invested a portion of the assets utilized in connection
with the expense offset arrangements in an income producing asset if it had
not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $710 has
been allocated to the fund, and an additional fee for each Trustees' 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 currently limit 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 six months ended February 28, 1998, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $37,203 and $4,020 from the sale of
class A and class M shares, respectively and $38,148 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 six
months ended February 28, 1998, Putnam Mutual Funds Corp., acting as
underwriter received $100 on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended February 28, 1998, purchases and sales of
investment securities other than short-term investments aggregated $52,235,762
and $35,464,657, 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 February 28, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
February 28, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 2,786,796 $28,373,423
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 100,048 898,426
- ------------------------------------------------------------
2,886,844 29,271,849
Shares
repurchased (2,589,557) (26,346,565)
- ------------------------------------------------------------
Net increase 297,287 $ 2,925,284
- ------------------------------------------------------------
Year ended
August 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 8,171,536 $95,009,853
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 9,734 99,096
- ------------------------------------------------------------
8,181,270 95,108,949
Shares
repurchased (3,932,795) (46,675,075)
- ------------------------------------------------------------
Net increase 4,248,475 $48,433,874
- ------------------------------------------------------------
Six months ended
February 28, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 1,643,339 $16,574,263
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 80,290 715,385
- ------------------------------------------------------------
1,723,629 17,289,648
Shares
repurchased (1,382,876) (13,905,975)
- ------------------------------------------------------------
Net increase 340,753 $ 3,383,673
- ------------------------------------------------------------
For the period
October 30, 1996
(commencement of
operations) to
August 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 4,052,401 $46,282,399
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,297 33,528
- ------------------------------------------------------------
4,055,698 46,315,927
Shares
repurchased (556,084) (6,437,953)
- ------------------------------------------------------------
Net increase 3,499,614 $39,877,974
- ------------------------------------------------------------
Six months ended
February 28, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 223,295 $2,337,716
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,480 75,725
- ------------------------------------------------------------
231,775 2,413,441
Shares
repurchased (208,694) (2,127,198)
- ------------------------------------------------------------
Net increase 23,081 $ 286,243
- ------------------------------------------------------------
For the period
October 30, 1996
(commencement of
operations) to
August 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 443,189 $5,086,818
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 297 3,024
- ------------------------------------------------------------
443,486 5,089,842
Shares
repurchased (72,367) (846,166)
- ------------------------------------------------------------
Net increase 371,119 $4,243,676
- ------------------------------------------------------------
At February 28, 1998, Putnam Investments, Inc. owned 502,351 of class A shares
(10.4% of class A shares outstanding), valued at $4,842,664.
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
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
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
Thomas R. Haslett
Vice President and Fund Manager
J. Peter Grant
Vice President and Fund Manager
Deborah S. Farrell
Vice President and Fund Manager
Stephen Oler
Vice President and Fund Manager
Carmel Peters
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Emerging Markets
Fund. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency;
and involve risk, including the possible loss of the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
SA004-41226 2AY/2CK/2CL 4/98
