Putnam
Balanced
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The Trustees of Putnam Balanced Fund are pleased to report impressive
returns for the fund in the 12 months that ended September 30, 1999. In a
year when stronger-than-expected economic growth prompted unexpected
action by the Federal Reserve Board, the fund once again demonstrated the
diversification benefits of a balanced portfolio of stocks and bonds.
Stocks outperformed bonds by a wide margin during the period, but they
also exhibited above-average volatility. Although bonds were weak
performers, their swings were significantly gentler. Your fund's managers,
Manuel Weiss Herrero and James M. Prusko, believe that as a result, your
fund's share price experienced greater relative stability than would have
occurred with a pure stock fund.
Total return for 12 months ended 9/30/99
NAV POP
- ----------------------------------------------------------------
20.25% 13.31%
- ----------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 6.
* STOCKS REACH NEW HIGHS WHILE BONDS WAVER
As the period opened on October 1, 1998, stocks and bonds were in the
midst of a recovery powered by the first in a series of three
interest-rate cuts by the Federal Reserve Board. The Fed took action to
counter the risks to global credit markets created by the Russian ruble
devaluation during the summer of 1998. The medicine did its job, and both
the bond and the stock markets rallied as investors became more confident.
The general gains at the end of 1998 gave way to much more uneven
performance in 1999. Fortunately the fund's equity strategy focuses on
large, growing companies. These have been, by many measures, the best and
steadiest performers in the market during 1999 as they were in previous
years. Although their success was interrupted twice by a temporary
rotation to value stocks in April and May and by a broad market decline in
August and September, large-cap growth stocks still registered robust
gains for the year.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance
and finance 10.8%
Electronics and
electrical equipment 10.2%
Telecommunications 9.1%
Pharmaceuticals 5.9%
Retail 4.8%
Footnote reads:
*Based on net assets as of 9/30/99. Holdings will vary over time.
Similarly bonds experienced several shifts in sector performance during
1999. In the first quarter, Treasury bonds began to fall in value as
economic reports showed stronger-than-expected economic growth. Expanding
output can cause inflationary pressures, and Treasury bonds are the
securities most sensitive to inflationary expectations. Since the spring,
bonds have suffered from the gathering pace of global economic growth and
two interest-rate increases by the Fed to restrain demand. Treasuries make
up only a minority of the fund's fixed-income stake, however, and fund
holdings in what we refer to as the spread sectors -- corporate bonds,
mortgage-backed securities, and high-yield issues -- outperformed
Treasuries during the annual period.
* TECHNOLOGY, RETAIL SECTORS SEE STRONG GROWTH
Although your fund's equity holdings are diversified across all of the
major sectors of the domestic economy, Manny Weiss' team targets companies
that are growing faster than the market average. This generally leads to a
heavier weighting in faster-growing industry sectors. This year, as in the
past two years, technology, telecommunications, and retail stocks have
offered some of the best opportunities.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
U.S. Treasury Obligation
6%, August 15, 2004
U.S. Treasury Obligation
5.375%, February 15, 2001
U.S. Treasury Obligation
5.25% May 15, 2004
Microsoft Corp.
Computer services and software
General Electric Co.
Electronics and electrical equipment
Cisco Systems, Inc.
Business equipment and services
Lucent Technologies, Inc.
Telecommunications
U.S. Government Agency
Mortgage Obligations
6.5%, September 15, 2024 -
February 15, 2029
Intel Corp.
Electronics and electrical equipment
Tyco International Ltd.
Medical supplies and devices
Footnote reads:
These holdings represent 31.5% of the fund's net assets as of 9/30/99.
Thanks to the global growth of the Internet, demand for voice and data
communications continues to fuel earnings growth in several industries.
Personal computer, semiconductor, cable, cellular, and data transmission
equipment companies are striving to supply the goods of the information
economy. One of the fund's top holdings, Lucent Technologies, has been
thriving. Recently the company has made several strategic acquisitions
that should position it for continued growth. In the technology sector,
Microsoft and Cisco Systems were among the fund's top performers. In the
retail sector, which benefited from rising consumer spending, the fund had
strong performance from positions in Wal-Mart Stores and Costco. 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.
* BONDS SPOOKED BY STRONGER U.S. AND WORLD GROWTH
A growing federal budget surplus, steady economic growth, and low loan
default rates provided a favorable fundamental background for bonds, but
the specter of future inflation was hard for investors to ignore. Stronger
global economic expansion puts pressure on bonds, while the swelling U.S.
trade deficit makes U.S. bonds less attractive to international investors.
The yield on the 30-year Treasury bond fluctuated near 6% for much of
1999, about a percentage point higher than its level as the fund's fiscal
year opened.
Jim Prusko, who manages the fixed-income portion of the portfolio,
addressed these risks with a number of tactical maneuvers. In the first
half of the year, he added to the fund's holdings in spread sectors that
generally outperformed Treasuries. The fund's duration stance, however,
detracted from returns, since the portfolio was sensitive to rising
interest rates. Within the fund's corporate bond holdings, Jim focused on
issues in the prosperous telecommunications and cable sectors with
rewarding results. For much of the year, the fund's significant weighting
in mortgage-backed bonds helped to offset partially the effects of rising
interest rates. These issues underperformed in the spring and summer,
however, as the Fed raised interest rates in part to slow down a vigorous
housing market.
* FUND POSITIONED TO SEIZE OPPORTUNITIES
As the fund enters its 2000 fiscal year, it is benefiting from generally
strong corporate earnings in many of its equity holdings. The fund's
managers plan to take advantage of possible weakness in the bond market
because year-end volatility could produce chances to buy undervalued
bonds. As always, the fund's diverse combination of stocks and bonds can
take advantage of a variety of opportunities for growth as well as income
while working to limit volatility.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 17, 1999
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 9/30/99, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which should
always be considered in light of its investment strategy. Putnam Balanced Fund
is designed for investors seeking capital growth and current income through a
portfolio of core-growth stocks and fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 9/30/99
Standard & Lehman Bros. Consumer
Poor's 500(R) Govt./Corp. price
NAV POP Index Bond Index index
- --------------------------------------------------------------------------
1 year 20.25% 13.31% 27.80% -1.63% 2.75%
- --------------------------------------------------------------------------
Life of fund
(since 1/3/95) 140.13 126.29 205.64 44.85 12.16
Annual average 20.30 18.80 26.53 8.12 2.45
- --------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A shares at POP
reflect the current maximum initial sales charge of 5.75%. Performance
data reflect an expense limitation currently or previously in effect.
Without the expense limitation the fund's total return would have been
lower. 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.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/99
- --------------------------------------------------------------------------
Distributions (number) 1
- --------------------------------------------------------------------------
Income $0.220
- --------------------------------------------------------------------------
Capital gains
Long-term 1.249
- --------------------------------------------------------------------------
Short-term 0.092
- --------------------------------------------------------------------------
Total $1.561
- --------------------------------------------------------------------------
Share value: NAV POP
- --------------------------------------------------------------------------
9/30/98 $11.92 $12.65
- --------------------------------------------------------------------------
9/30/99 12.63 13.40
- --------------------------------------------------------------------------
[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
Lehman Bros.
Fund's shares Standard & Poor's Gov./Corp. Consumer price
Date at POP 500 Index Bond Index index
1/3/95 9,425 10,000 10,000 10,000
6/30/95 11,020 12,021 11,180 10,187
12/31/95 12,256 13,758 11,924 10,254
6/30/96 12,940 15,147 11,700 10,468
12/31/96 13,941 16,917 12,270 10,595
6/30/97 15,605 20,403 12,607 10,708
12/31/97 16,923 22,561 13,468 10,775
6/30/98 19,970 26,556 14,029 10,888
12/31/98 21,482 29,008 14,744 10,969
6/30/99 22,969 32,600 14,407 11,102
9/30/99 $22,629 $30,564 $14,485 $11,216
Footnote reads:
Past performance is no assurance of future results. See first page of
performance section for performance calculation method.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 5.75% maximum sales charge.
Comparative benchmarks
Standard and Poor's 500 Index* is an index of common stocks frequently
used as a general measure of stock market performance.
Lehman Bros. Government/Corporate Bond Index* is an index of publicly
issued U.S. Treasury obligations, debt obligations of U.S. government
agencies (excluding mortgage-backed securities), fixed-rate,
non-convertible, investment-grade corporate debt securities and U.S.
dollar-denominated, SEC-registered non-convertible debt issued by foreign
governmental entities or international agencies used as a general measure
of the performance of fixed-income securities.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take into account brokerage fees or taxes. Securities
in the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as
of the last day of the reporting period. Holdings are organized by asset
type and industry sector, country, or state to show areas of concentration
and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and non-investment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for
the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that remain
in the portfolio -- any change in unrealized gains or losses over the
period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of
the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed here
may not match the sources listed in the Statement of operations because
the distributions are determined on a tax basis and may be paid in a
different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also
includes the current reporting period. For open-ended funds, a separate
table is provided for each share class.
Report of independent accountants
For the fiscal year ended September 30, 1999
To the Board of Trustees of Putnam Investment Funds
and Shareholders of Putnam Balanced Fund
(a series of Putnam Investment Funds)
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, 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 Balanced Fund
(the "fund") at September 30, 1999, 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, 1999 by correspondence with the custodian, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 9, 1999
<TABLE>
<CAPTION>
The fund's portfolio
September 30, 1999
COMMON STOCKS (58.1%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Broadcasting (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
515 CBS Corp. (NON) $ 23,819
285 Clear Channel Communications, Inc. (NON) 22,764
820 Comcast Corp. Class A 32,698
350 MediaOne Group Inc. (NON) 23,909
--------------
103,190
Business Equipment and Services (3.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,272 Cisco Systems, Inc. (NON) 87,212
610 EMC Corp. (NON) 43,577
240 Omnicom Group, Inc. 19,005
--------------
149,794
Chemicals (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
240 Avery Dennison Corp. 12,660
200 Praxair, Inc. 9,200
--------------
21,860
Computer Equipment (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
310 Lexmark International Group, Inc. Class A (NON) 24,955
430 Sun Microsystems, Inc. (NON) 39,990
--------------
64,945
Computer Services and Software (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
390 America Online, Inc. (NON) 40,560
240 BMC Software, Inc. (NON) 17,175
1,640 Microsoft Corp. (NON) 148,523
265 Oracle Corp. (NON) 12,058
200 Siebel Systems, Inc. (NON) 13,325
320 Unisys Corp. (NON) 14,440
380 VERITAS Software Corp. (NON) 28,856
90 Yahoo! Inc. (NON) 16,155
--------------
291,092
Computers (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
245 Apple Computer, Inc. (NON) 15,512
745 Dell Computer Corp. (NON) 31,150
285 Gateway, Inc. (NON) 12,665
290 Hewlett-Packard Co. 26,680
462 IBM Corp. 56,075
--------------
142,082
Conglomerates (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
385 United Technologies Corp. 22,835
Consumer Non Durables (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
395 Colgate-Palmolive Co. 18,071
330 Estee Lauder Cos. Class A 12,891
--------------
30,962
Electronics and Electrical Equipment (10.2%)
- --------------------------------------------------------------------------------------------------------------------------
325 Applied Materials, Inc. (NON) 25,248
1,008 General Electric Co. 119,511
335 Illinois Tool Works, Inc. 24,978
880 Intel Corp. 65,395
205 JDS Uniphase Corp. (NON) 23,332
185 LAM Research Corp. (NON) 11,285
330 LSI Logic Corp. (NON) 16,995
500 Motorola, Inc. 44,000
322 Solectron Corp. (NON) 23,124
470 Texas Instruments, Inc. 38,658
170 Xilinx, Inc. (NON) 11,140
--------------
403,666
Entertainment (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
445 Time Warner, Inc. 27,034
728 Viacom, Inc. Class B (NON) 30,758
--------------
57,792
Food and Beverages (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
180 Anheuser-Busch Cos., Inc. 12,611
Insurance and Finance (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
225 American Express Co. 30,291
278 American International Group, Inc. 24,125
410 Capital One Financial Corp. 15,990
737 Citigroup, Inc. 32,428
385 Schwab (Charles) Corp. 12,970
--------------
115,804
Medical Supplies and Devices (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
245 Allergan, Inc. 26,950
170 Bausch & Lomb, Inc. 11,209
555 Tyco International Ltd. 57,304
155 VISX, Inc. (NON) 12,260
--------------
107,723
Oil and Gas (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
600 Enron Corp. 24,750
Pharmaceuticals (5.9%)
- --------------------------------------------------------------------------------------------------------------------------
300 Amgen Inc. (NON) 24,450
320 Biogen, Inc. (NON) 25,220
755 Bristol-Myers Squibb Co. 50,963
130 Immunex Corp. (NON) 5,639
475 Johnson & Johnson 43,641
100 Medimmune, Inc. (NON) 9,966
940 Schering-Plough Corp. 41,008
510 Warner-Lambert Co. 33,851
--------------
234,738
Retail (4.7%)
- --------------------------------------------------------------------------------------------------------------------------
312 Best Buy Co., Inc. (NON) 19,364
500 Circuit City Stores, Inc. 21,094
355 Costco Wholesale Corp. (NON) 25,560
215 CVS Corp. 8,775
245 Kohls Corp. (NON) 16,201
346 Lowe's Cos., Inc. 16,868
911 TJX Cos., Inc. (The) 25,565
1,098 Wal-Mart Stores, Inc. 52,224
--------------
185,651
Telecommunications (8.4%)
- --------------------------------------------------------------------------------------------------------------------------
1 AT&T Corp. 44
1,065 AT&T Corp. -- Liberty Media Group Class A 39,535
259 Comverse Technology, Inc. (NON) 24,427
1,289 Lucent Technologies, Inc. (NON) 83,624
565 MCI WorldCom, Inc. (NON) 40,609
215 QUALCOMM, Inc. (NON) 40,675
810 Sprint Corp. (NON) 43,943
457 Sprint PCS 34,075
445 Tellabs, Inc. (NON) 25,337
--------------
332,269
--------------
Total Common Stocks (cost $1,731,349) $ 2,301,764
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (22.6%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association Pass-Through
Certificates
$ 17,929 7s, February 1, 2012 $ 17,912
22,183 6s, June 1, 2012 21,337
10,000 5 1/8s, February 13, 2004 9,528
Government National Mortgage Association Pass-Through
Certificates
37,281 8s, October 15, 2026 38,096
24,533 7s, May 15, 2023 24,189
76,279 6 1/2s, with due dates from September 15, 2024
to February 15, 2029 72,918
--------------
183,980
U.S. Treasury Obligations (18.0%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
2,000 6 1/8s, November 15, 2027 1,942
5,000 5 1/4s, February 15, 2029 4,376
5,000 5 1/4s, November 15, 2028 4,334
U.S. Treasury Notes
40,000 6s, August 15, 2009 40,325
275,000 6s, August 15, 2004 277,665
40,000 5 1/2s, May 15, 2009 38,706
5,000 5 1/2s, August 31, 2001 4,988
175,000 5 3/8s, February 15, 2001 174,508
165,000 5 1/4s, May 15, 2004 161,261
5,000 4 3/4s, February 15, 2004 4,796
--------------
712,901
--------------
Total U.S. Government and Agency Obligations
(cost $905,997) $ 896,881
CORPORATE BONDS AND NOTES (16.1%) (a)
PRINCIPAL AMOUNT VALUE
Aerospace and Defense (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
$ 5,000 Boeing Co. deb. 6 5/8s, 2038 $ 4,325
10,000 Raytheon Co. notes 6.45s, 2002 9,905
5,000 Raytheon Co. deb. 6.4s, 2018 4,294
--------------
18,524
Airlines (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,996 Northwest Airlines Corp. pass-thru certificate
Ser. 1999-1A, 6.81s, 2020 4,499
Automotive (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Delphi Automotive Systems Corp. deb. 7 1/8s, 2029 4,503
Basic Industrial Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 American Standard Companies, Inc. sr. notes 7 3/8s, 2008 4,550
7,000 Ball Corp. company guaranty 7 3/4s, 2006 6,790
--------------
11,340
Broadcasting (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 CBS Corp. sr. notes 7.15s, 2005 4,934
5,000 TCI Communications Inc deb. 8 3/4s, 2015 5,582
--------------
10,516
Business Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
9,998 Federal Express Corp. pass-thru certificates Ser. 1998-1A,
6.72s, 2022 9,465
Chemicals (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Nova Chemicals Corp. deb. 7s, 2026 (Canada) 4,905
5,000 Rohm & Haas Co. 144A deb. 7.85s, 2029 5,078
--------------
9,983
Computers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 IBM Corp. deb. 7 1/8s, 2096 4,787
Consumer Services (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Hertz Corp. notes 6 1/4s, 2009 4,586
5,000 Hertz Corp. sr. notes 6 1/2s, 2006 4,781
5,000 Imperial Tobacco Global company guarantee 71/8s, 2009 4,669
5,000 Philip Morris Companies Inc. notes 6.8s, 2003 4,964
--------------
19,000
Energy-Related (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 KN Capital Trust III company guaranty 7.63s, 2028 4,221
5,000 Osprey Trust 144A sec. notes 8.31s, 2003 5,031
--------------
9,252
Entertainment (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 News America Holdings, Inc. deb. 7 3/4s, 2045 4,473
5,000 Time Warner Entertainment Inc. notes 8 7/8s, 2012 5,548
15,000 Time Warner Entertainment sr. notes 8 3/8s, 2033 15,999
20,000 Walt Disney Co. med. term notes 5.62s, 2008 18,063
--------------
44,083
Food and Beverages (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 Pepsi Bottling Group Inc. sr. notes Ser. B, 7s, 2029 9,200
Health Care (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Tenet Healthcare Corp. sr. notes 8s, 2005 4,750
5,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 4,750
--------------
9,500
Insurance and Finance (8.0%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 4,661
5,000 AFC Capital Trust company guaranty Ser. B, 8.207s, 2027 4,801
5,000 AFLAC Inc. sr. notes 6 1/2s, 2009 4,714
10,000 American General Institute 144A company guaranty
8 1/8s, 2046 10,066
5,000 Bank United unit Ser. A, 8s, 2009 4,749
5,000 BankAmerica Corp. sr. notes 5 7/8s, 2009 4,557
5,000 Capital One Financial Corp. notes 7 1/4s, 2006 4,750
5,000 Capital One Financial Corp. notes 7 1/4s, 2003 4,875
5,000 CIT Group Holdings sr. notes 6 1/2s, 2002 4,950
5,000 Citicorp sub. notes 6 3/8s, 2008 4,727
5,000 Colonial Bank sub. notes 8s, 2009 4,719
15,000 Conseco Financing Trust II company guaranty 8.7s, 2026 13,353
5,000 Conseco Inc. med-term notes 6 1/2s, 2002 4,776
5,000 Dime Bancorp, Inc. sr. notes 6 3/8s, 2001 4,954
25,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 24,872
5,000 Dresdner Funding Trust I 144A notes 8.151s, 2031 4,588
5,000 Executive Risk Capital Trust company guaranty Ser. B,
8.675s, 2027 5,003
5,000 Finova Capital Corp. med-term notes 6.11s, 2003 4,874
5,000 Finova Capital Corp. notes 7.4s, 2007 4,944
5,000 Finova Capital Corp. notes 6 1/4s, 2002 4,909
3,000 First Citizens Bank Capital Trust I company guaranty
8.05s, 2028 2,700
5,000 Firstar Capital Trust I company guaranty Ser. B, 8.32s, 2026 4,990
5,000 Ford Motor Credit Corp. sr. notes 5.8s, 2009 4,543
5,000 General Motors Acceptance Corp. sr. unsub. 5.85s, 2009 4,611
5,000 Hartford Life, Inc. deb. 7.65s, 2027 4,854
10,000 Household Finance Corp. notes 6 1/2s, 2008 9,409
5,000 Imperial Bank sub. notes 8 1/2s, 2009 4,750
5,000 Lehman Bros Holdings, Inc. notes 6 1/4s, 2003 4,862
5,000 Markel Capital Trust I company guaranty Ser. B, 8.71s, 2046 4,396
5,000 Merey Sweeney L.P. 144A sr. notes 8.85s, 2019 4,990
5,000 Newcourt Credit Group Inc. 144A notes 6 7/8s, 2005 4,878
5,000 Newcourt Credit Group, Inc. 144A company guaranty
7 1/8s, 2003 4,929
5,000 Norwest Corp. med. term sr. notes Ser. J, 6 3/4s, 2027 4,439
15,000 Paine Webber Group, Inc. sr. med. term notes 6.52s, 2005 14,231
5,000 Peoples Bank-Bridgeport sub. notes 7.2s, 2006 4,656
5,000 Presidential Life Corp. sr. notes 7 7/8s, 2009 4,738
5,000 Provident Companies, Inc. bonds 7.405s, 2038 4,340
5,000 Prudential Insurance Co. 144A 6 7/8s, 2003 5,000
5,000 Salomon, Inc. sr. notes 7.3s, 2002 5,080
10,000 Salomon, Inc. sr. notes 6 3/4s, 2003 9,944
10,000 Sears Roebuck Acceptance Corp. notes 6 1/2s, 2028 8,228
5,000 Sovereign Bancorp, Inc. sr. notes 6 5/8s, 2001 4,947
5,000 Sprint Capital Corp. company guaranty 6.9s, 2019 4,631
10,000 Sprint Capital Corp. company guaranty 6 1/8s, 2008 9,298
5,000 Sprint Capital Corp. company guaranty 5.7s, 2003 4,775
5,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 4,869
10,000 Sun Life Canada Capital Trust 144A 8.526s, 2049 9,551
5,000 Tig Capital Trust I 144A bonds 8.597s, 2027 4,668
5,000 Toyota Motor Credit Corp. notes 5 5/8s, 2003 4,824
5,000 Transamerica Capital III bonds 7 5/8s, 2037 4,676
5,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 4,081
5,000 Webster Capital Trust I 144A bonds 9.36s, 2027 4,807
5,000 Zurich Capital Trust I 144A company guaranty
8.376s, 2037 4,857
--------------
316,394
Oil and Gas (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Coastal Corp. bonds 6.95s, 2028 4,414
2,998 Express Pipeline Ltd. 144A sub. notes Ser. B, 7.39s,
2019 (Canada) 2,629
5,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 4,990
5,000 Norsk Hydro ASA notes 6.36s, 2009 (Norway) 4,638
10,000 Petro Geo-Services sr. notes 7 1/8s, 2028 (Norway) 8,868
5,000 Union Oil Company of California company guaranty
7 1/2s, 2029 4,778
--------------
30,317
Publishing (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 News America Holdings, Inc. deb. 7.7s, 2025 4,691
Real Estate (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 EOP Operating L.P. notes 6.8s, 2009 4,631
5,000 EOP Operating L.P. notes 6 3/8s, 2002 4,910
5,000 EOP Operating L.P. sr. notes 6 3/4s, 2008 (R) 4,627
5,000 Omega Healthcare Investors, Inc. notes 6.95s, 2002 (R) 4,733
--------------
18,901
Restaurants (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Tricon Global Restaurants, Inc. sr. notes 7.45s, 2005 4,771
Retail (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 5,228
Specialty Consumer Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Tyco International Ltd. company guaranty 6 1/4s, 2003 4,844
Telecommunications (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 AT&T Capital Corp. med. term notes 6.6s, 2005 4,820
5,000 U S West, Inc. notes 5 5/8s, 2008 4,438
15,000 WorldCom, Inc. sr. notes 6.4s, 2005 14,493
5,000 WorldCom, Inc. sr. notes 6.95s, 2028 4,659
--------------
28,410
Transportation (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 4,795
4,588 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2008 4,424
10,000 CSX Corp. deb. 7.95s, 2027 10,041
--------------
19,260
Utilities (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Aes Eastern Energy 144A pass through certificates 9s, 2017 4,870
5,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 4,825
5,000 GTE Corp. deb. 6.46s, 2008 4,786
1,931 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 2,011
3,173 Northeast Utilities System notes Ser. B, 8.38s, 2005 3,154
10,000 Public Service Co. of New Mexico sr. notes Ser. B,
7 1/2s, 2018 9,593
5,000 Texas New-Mexico Power Utilities 1st mtge. 9 1/4s, 2000 5,123
5,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 5,038
5,000 TXU Electrical Capital company guaranty 8.175s, 2037 4,800
--------------
44,200
--------------
Total Corporate Bonds and Notes (cost $682,016) 641,668
COLLATERALIZED MORTGAGE OBLIGATIONS (0.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 4,960 Housing Securities Inc. Ser. 93-F, Class F9M2, 7s,
September 25, 2023 $ 4,754
4,431 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2, Class A1,
6.22s, February 15, 2030 4,321
4,774 Prudential Home Mortgage Securities 144A Ser. 93-31,
Class B2, 6s, August 25, 2000 4,691
21,941 Ryland Mortgage Securities Corp. Ser. 94-7C, Class B1,
7.359s, August 25, 2025 21,173
--------------
Total Collateralized Mortgage Obligations
(cost $33,117) $ 34,939
FOREIGN GOVERNMENT BONDS AND NOTES (0.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 15,000 Ontario (Province of) sr. unsub. 5 1/2s, 2008 (Canada) $ 13,700
5,000 Quebec (Province of) sr. unsub. 5 3/4s, 2009 (Canada) 4,576
--------------
Total Foreign Government Bonds and Notes
(cost $19,922) $ 18,276
PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
5 Centaur Funding Corp 144A $9.08 pfd. (Cayman Islands) $ 5,236
250 TCR Holding Corp. Class E, zero % pfd. 16
--------------
Total Preferred Stocks (cost $5,016) $ 5,252
SHORT-TERM INVESTMENTS (0.6%) (a) (cost $23,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 23,000 Interest in $750,000,000 joint tri-party repurchase
agreement dated September 30, 1999 with
Goldman Sachs & Co. due October 1, 1999 with
respect to various U.S. Treasury obligations --
maturity value of $23,003 for an effective yield of 5.29% $ 23,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $3,400,417) (b) $ 3,921,780
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,966,560.
(b) The aggregate identified cost on a tax basis is $3,403,845, resulting in gross unrealized appreciation and
depreciation of $619,905 and $101,970, respectively, or net unrealized appreciation of $517,935.
(NON) Non-income-producing security.
(R) Real Estate Investment Trust.
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.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $3,400,417) (Note 1) $3,921,780
- -----------------------------------------------------------------------------------------------
Cash 21,257
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 24,077
- -----------------------------------------------------------------------------------------------
Receivable for the shares of the fund sold 350
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 32,430
- -----------------------------------------------------------------------------------------------
Receivable from Manager (Note 2) 21,403
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 319
- -----------------------------------------------------------------------------------------------
Total assets 4,021,616
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 41,479
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 536
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 2,321
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 10
- -----------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 6,425
- -----------------------------------------------------------------------------------------------
Other accrued expenses 4,285
- -----------------------------------------------------------------------------------------------
Total liabilities 55,056
- -----------------------------------------------------------------------------------------------
Net assets $3,966,560
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,962,132
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 57,862
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investment (Note 1) 425,203
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 521,363
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $3,966,560
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per share
($3,966,560 divided by 314,142 shares) $12.63
- -----------------------------------------------------------------------------------------------
Offering price (100/94.25 of $12.63)* $13.40
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales, the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1999
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends $ 10,432
- -----------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $28) 90,244
- -----------------------------------------------------------------------------------------------
Total investment income 100,676
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 24,228
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 6,724
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,468
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 40
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 2,927
- -----------------------------------------------------------------------------------------------
Reports to shareholders 5,695
- -----------------------------------------------------------------------------------------------
Registration fees 161
- -----------------------------------------------------------------------------------------------
Auditing 40,335
- -----------------------------------------------------------------------------------------------
Legal 3,561
- -----------------------------------------------------------------------------------------------
Postage 557
- -----------------------------------------------------------------------------------------------
Other 128
- -----------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (57,695)
- -----------------------------------------------------------------------------------------------
Total expenses 29,129
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (4,960)
- -----------------------------------------------------------------------------------------------
Net expenses 24,169
- -----------------------------------------------------------------------------------------------
Net investment income 76,507
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 428,717
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (494)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in foreign currencies
during the year 482
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments
during the year 140,967
- -----------------------------------------------------------------------------------------------
Net gain on investments 569,672
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $646,179
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 76,507 $ 55,650
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 428,223 361,798
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 141,449 (78,192)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 646,179 339,256
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (58,592) (59,126)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments (357,149) (235,797)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 588,681 334,405
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 819,119 378,738
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 3,147,441 2,768,703
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $57,862 and $37,442, respectively) $3,966,560 $3,147,441
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Jan. 3, 1995+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.92 $11.90 $11.03 $10.56 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .25(c)(d) .22(c) .25 .29 .23
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 2.02 1.05 2.16 1.18 1.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 2.27 1.27 2.41 1.47 2.06
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.25) (.27) (.35) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.34) (1.00) (1.27) (.65) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.56) (1.25) (1.54) (1.00) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.63 $11.92 $11.90 $11.03 $10.56
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 20.25 12.18 24.58 15.01 24.24*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,967 $3,147 $2,769 $2,246 $1,951
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(a)(c) .78 .77 .71 .73 .54*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(a) 2.05 1.82 2.29 2.72 2.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 123.90 139.55 151.15 170.75 95.15*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Reflects an expense limitation during the period ( Note 2). As a result of such limitation, expenses of the fund for the
periods ended September 30, 1999, 1998, 1997, 1996 and 1995 reflect a reduction of $0.19, $0.13, $0.12, $0.15, and $0.23
per share, respectively.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Net investment income and the ratio of expenses to average net assets includes amounts paid through expense
offset arrangements (Note 2).
(d) Per share net investment income has been determined on the basis of weighted average number of shares outstanding
during the year.
</TABLE>
Notes to financial statements
September 30, 1999
Note 1
Significant accounting policies
Putnam Balanced Fund (the "fund") is one of a series of Putnam Investment
Funds (the "trust") which is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment
company. The objective of the fund is to seek capital growth and current
income.
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
at the date of the financial statements and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. 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.
Market quotations are not considered to be readily available for long term
corporate bonds and notes; such investments are stated at fair market
value on the basis of valuations furnished by a pricing service, approved
by the Trustees, which determines valuations for normal,
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 value following procedures approved by the
Trustees.
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). Gains or losses on securities sold are determined on
the identified cost basis.
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. Discounts on original issue discount bonds are accreted
according to the yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The fund
does not isolate that portion of realized or unrealized gains or losses
resulting from changes in the foreign exchange rate on investments from
fluctuations arising from changes in the market prices of the securities.
Such gains and losses are included with the net realized and unrealized
gain or loss on investments. Net realized gains and losses on foreign
currency transactions represent net realized 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) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the unit
price has been established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate more than 1.0%
from the principal amount. The fund holds, and maintains until settlement
date, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or the fund may enter into offsetting contracts for
the forward sale of other securities it owns. Income on the securities
will not be earned until settlement date. TBA purchase commitments may be
considered securities in themselves, and involve a risk of loss if the
value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in the value of the
fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
the intention of acquiring securities for their portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of
a commitment prior to settlement if Putnam Management deems it appropriate
to do so.
H) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale commitments
are not received until the contractual settlement date. During the time a
TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transactions.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security valuation" above. The contract is "marked-to-market" daily
and the change in market value is recorded by the fund as an unrealized
gain or loss. If the TBA sale commitment is closed through the acquisition
of an offsetting purchase commitment, the fund realizes a gain or loss. If
the fund delivers securities under the commitment, the fund realizes a
gain or a loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
I) 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, 1999, the fund had no borrowings against the line of credit.
J) 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.
K) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. The amount and character of income and gains
to be distributed are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences include temporary and permanent differences of losses on wash
sale transactions, foreign currency gains and losses, post-October loss
deferrals, organization costs, paydown gains and losses on mortgage-backed
securities and market discount. 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, 1999, the fund reclassified $2,505 to
increase undistributed net investment income and $2,791 to decrease
paid-in-capital, with an increase to accumulated net realized gains and
losses of $286. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
L) 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.
M) 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: 0.65% of the first $500
million of average net assets, 0.55% of the next $500 million, 0.50% of
the next $500 million, 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion, and
0.38% thereafter.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through December 31, 1999, 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 0.70% of the fund's average net assets.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1999, fund expenses were reduced by
$4,960 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 $100 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted a distribution plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The purpose of the Plan is
to compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments, Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plan provides for payment by
the fund to Putnam Mutual Funds Corp. at an annual rate of up to 0.35% of
the fund's average net assets. Currently, no payments are being made on
the plan.
For the year ended September 30, 1999, Putnam Mutual Funds, Corp., acting
as the underwriter received no monies in contingent deferred sales charges
from redemptions of class A shares acquired through exchanges from another
fund. For the year ended September 30, 1999, Putnam Mutual Funds Corp.,
acting as underwriter received no monies on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 1999, cost of purchases and proceeds
from sales of investment securities other than U.S. government obligations
and short-term investments aggregated $3,851,578 and $3,720,716,
respectively. Purchases and sales of U.S. government obligations
aggregated $877,962 and $778,923, respectively.
Note 4
Capital shares
At September 30, 1999, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended September 30, 1999
- -----------------------------------------------------------------------------
Shares Amount
- -----------------------------------------------------------------------------
Shares sold 17,014 $208,524
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 35,933 415,741
- -----------------------------------------------------------------------------
52,947 624,265
Shares
repurchased (2,849) (35,584)
- -----------------------------------------------------------------------------
Net increase 50,098 $588,681
- -----------------------------------------------------------------------------
Year ended September 30, 1998
- -----------------------------------------------------------------------------
Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,039 $ 48,660
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 28,249 294,923
- -----------------------------------------------------------------------------
32,288 343,583
Shares
repurchased (857) (9,178)
- -----------------------------------------------------------------------------
Net increase 31,431 $334,405
- -----------------------------------------------------------------------------
At September 30, 1999, Putnam Management owned 285,190 shares of the fund
(90.8% of shares outstanding) valued at $3,601,950.
Federal tax information
(Unaudited)
The fund has designated 13.04% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $390,311 as capital gain, for its taxable year ended
September 30, 1999.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Fund information
WEB SITE
www.putnaminv.com
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
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
John J. Morgan Jr.
Vice President
C. Beth Cotner
Vice President
Manuel Weiss Herrero
Vice President and Fund Manager
James M. Prusko
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam Balanced
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' Web site: 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.
56137-318 11/99
