Putnam
Small Cap
Value Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
2-29-00
[SCALE LOGO OMITTED]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The markets continued to provide their share of challenges and
opportunities as your fund closed its books on fiscal year 2000. In the
following report, the fund's managers discuss performance for the period
and prospects for the months ahead.
This is the last letter to you and the other shareholders of Putnam Small
Cap Value Fund that I will be signing. After more than 30 years as
Chairman of the Trustees and President of the Putnam Funds, the time has
come for me to step aside. In June, John Hill will become Chairman. John
is currently an independent Trustee and has served on the board for the
past 14 years. In addition, my son, George Putnam, III, will take on the
role of President. I am confident that the leadership of the funds will be
in exceptionally strong hands.
I will become Chairman Emeritus, remain a Putnam shareholder, and stay in
close touch with the funds. It has been my privilege to serve you.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
April 19, 2000
Report from the Fund Managers
Jeffrey W. Netols
Edward T. Shadek, Jr.
When you are at sea in the midst of a storm, the most important goal is to
stay afloat and reach the shore safely. And that is exactly what your fund
management team has done while value stocks, the main focus of your fund,
have been beaten down in favor of the "new economy" stocks. However, while
most value stocks were not in sync with the broad market momentum,
small-capitalization stocks, led by technology and energy stocks, have
surged ahead. This narrow group of small-company stocks has performed
exceptionally well, paving the way for your fund to turn in strong
performance for fiscal 2000 despite the storm hovering over larger-cap
value stocks.
Total return for life of fund ended 2/29/00
Class A Class B Class C
NAV POP NAV CDSC NAV CDSC
- ----------------------------------------------------------------------------
18.23% 11.41% 17.52% 12.52% 17.48% 16.48%
- ----------------------------------------------------------------------------
Past performance is no guarantee of future results. Performance
information and explanation of performance calculation methods begin on
page 6.
* FOCUS ON UNDERVALUED SMALL COMPANIES MINIMIZES RISK
Since this is only our second report to shareholders, we would first like
to review our investment strategy for this fund, which began operating
last April. We invest in companies with market capitalizations similar to
those in the Russell 2000 Index, better known as small-cap companies.
Small-cap companies are attractive because they can exploit new
opportunities more quickly and efficiently than larger companies. However,
because investments in these companies carry more risk than investments in
the well-established, larger companies of the Dow Jones Industrial Average
or the Standard & Poor's 500 Index, we look for value stocks --
specifically undervalued stocks -- as the means of tempering volatility.
Undervalued stocks usually carry attractive price-to-book value ratios or
low price-to-earnings ratios and because they have already fallen in
price, can be less vulnerable to general market swings.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Electronics 10.7%
Health care services 7.8%
Banking 6.3%
Technology services 6.1%
Retail 5.7%
Footnote reads:
*Based on net assets as of 2/29/00. Holdings will vary over time.
But there is more to value investing than buying attractive ratios and
cheap stocks. Within the value group, we also look for well-established
businesses, positive earnings growth, and strong management that will
contribute to powerful performance. One other factor that is important to
our strategy includes the principle of "cheapness and change." We seek
companies that have shown some positive changes such as internal
restructuring, new management, cost-cutting initiatives, new advertising
plans, and investment in new ideas. If these changes begin to have an
impact on earnings, smaller companies have a chance to grow, increase
profits, and become better known in their industries, contributing to
higher stock prices.
When your fund first came to market last spring, the timing was excellent
for a narrow group of small-cap stocks. The Russell 2000 Index, which
tracks small U.S. companies, returned 21.26% by the end of 1999. However,
in an era in which technology and Internet companies have captured the
fascination of investors and flourished despite rising interest rates,
value stocks have had a difficult time. But the good news is that the
challenging market has allowed us to buy undervalued stocks at very
attractive prices, prices that have been pushed down by lack of interest
and by a tighter monetary policy.
* TECHNOLOGY SECTOR DRIVES PERFORMANCE
When the fund was established almost 10 months ago, many technology stocks
were still available at compelling valuations and we took advantage of
those prices. Since then, the technology sector, which includes electronic
products, has become the largest sector of the fund and has been an
important contributor to performance. One noteworthy company from this
group is Methode Electronics, a producer of electronic and optical
components, including connectors, current carrying distribution systems
(which help transmit data efficiently), and automotive electronic
controls. Daimler-Chrysler and Ford account for about 40% of Methode's
total sales. The fund's investment in Methode has more than doubled during
the past nine months. While this holding, as well as others discussed in
this report, was 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 well vary in the future.
"Historically investors that bought quality companies with cheap valuations
have been rewarded."
- -- Edward Shadek, Jr., manager, Putnam Small Cap Value Fund
Another outstanding investment from the technology sector has been Telxon
Corporation, which designs handheld computers, bar code scanners, and
automatic identification devices as well as wireless data communications
products. Telxon specializes in designing inventory tracking systems for
retailers like Wal-Mart and Federated Department Stores but has other key
markets as well. The seemingly unstoppable growth of the Internet has put
Telxon right where the action is, and its share price of $21.50 at the end
of the fiscal year, reflects this momentum.
One other technology holding, X-Rite, Inc., has seen superb growth since
we purchased the stock. X-Rite makes color measurement instruments that
ensure that your fabrics, paints, and plastics are just the right shade of
blue, red, or violet. It also develops color, testing equipment that
measures light and density, which is necessary for processing x-rays,
film, and inks. The company's products are sold directly to the public or
through sales representatives.
* ENERGY/OIL STOCKS ARE STRONG CONTRIBUTORS
Over the winter as oil prices have gone up, energy and oil service stocks
have followed suit and the fund has been positioned to benefit. One
example of a top-performing stock from this sector is Tidewater, Inc.,
which is the world's number-one provider of offshore supply vessels and
marine support services. The company transports crews and supplies to
offshore platforms and oil rigs; 30% of Tidewater's sales comes from the
Gulf of Mexico, but the company also services rigs all over the world,
including Australia, Brazil, the North Sea, the Persian Gulf, and
Venezuela.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Methode Electronics, Inc.
Electronics
General Cable Corp.
Electronics
Pier 1 Imports, Inc.
Retail
FileNET Corp.
Technology services
Bank United Corp.
Banking
Owen & Minor, Inc.
Medical technology
AAR Corp.
Aerospace and defense
Davox Corp.
Technology services
Omnicare, Inc.
Health-care services
X-Rite, Inc.
Electronics
Footnote reads:
These holdings represent 10.5% of the fund's net assets as of 2/29/00.
Portfolio holdings will vary over time.
Another key holding in the energy sector, Pride International, Inc., is
one of the world's top oil well servicing contractors. Pride also designs
and provides drilling equipment, project management services, and oil well
engineering. The firm owns a fleet of nearly 320 rigs of all types,
focusing on services in the Gulf of Mexico and overseas. Tidewater and
Pride share prices have gone up substantially during the fiscal year,
contributing to the fund's positive performance.
* FOR NEAR FUTURE, FINDING EXCELLENCE WITH LOW VALUATIONS
With value stocks struggling, we have had the opportunity to invest in
several outstanding high-growth companies at greatly undervalued prices.
Consequently, we have been able to put together an exceptionally
high-quality portfolio at unusually attractive prices. We cannot say when
value stocks will emerge from their depressed lows, but when they do,
investors have the potential for substantial gains. Shortly after the
fiscal year's end, we saw some initial signs in the market that old
economy value stocks were gaining investor attention. Historically
investors that bought quality companies with cheap valuations have been
rewarded.
As for the small-company technology stocks, rising interest rates, oddly
enough, can be mildly beneficial. Since most tech companies raise money in
the stock market, higher interest rates have not added noticeably to their
costs. Higher short-term rates have actually increased the interest income
on all the cash that many tech companies have on hand from equity issuance
and venture capital financing. Also Wall Street has treated tech companies
differently, basically ignoring earnings and focusing on market
opportunity.
"Just as nature abhors a vacuum, the investment process abhors wide gaps in
valuation and the gap between growth and value is the widest seen in recent
memory and is well beyond historical norms. Adjustments in these disparities
can be violent and produce exceptional returns over time for investors with
foresight, conviction, and patience."
- -- Dr. Robert Goodman, Managing Director and Senior Economic Advisor, Putnam
Investments
When the Federal Reserve Board begins to see a slowdown in the economy as
a result of its four recent interest-rate increases (prior to the end of
the reporting period), value stocks should begin to rebound. Because we
have taken full advantage of the lower prices on value stocks during this
time and will maintain our emphasis in the technology area, your fund is
well positioned to continue its solid performance as we move into the new
fiscal year.
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 2/29/00, there is no guarantee the fund will
continue to hold these securities in the future. This fund invests all or
a portion of its assets in small to midsize companies. Such investments
increase the risk of greater price fluctuations.
Performance summary
This section provides information about your fund's performance, which should
always be considered in light of its investment strategy. Putnam Small Cap
Value Fund seeks capital appreciation through investments in common stocks of
small companies.
TOTAL RETURN FOR PERIOD ENDED 2/29/00
Class A Class B Class C
(inception dates) (4/13/99) (5/3/99) (7/26/99)
NAV POP NAV CDSC NAV CDSC
- ----------------------------------------------------------------------------
Life of fund 18.23% 11.41% 17.52% 12.52% 17.48% 16.48%
- ----------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 2/29/00
Russell Consumer
2000 Index price index
- ----------------------------------------------------------------------------
Life of fund 34.90% 2.29%
- ----------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A shares reflect
the current maximum initial sales charges of 5.75%. Class B share returns
for the life-of-fund 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 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 shares the higher operating expenses applicable to such shares.
For class C shares, returns for periods prior to their inception are
derived from the historical performance of class A shares, adjusted to
reflect both the CDSC currently applicable to class C shares, which is 1%
for the first year and is eliminated thereafter, and the higher operating
expenses applicable to class C shares. All returns assume reinvestment of
distributions at NAV. Investment return and principal value will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.
[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 4/13/99
Fund's class A Russell 2000 Consumer price
Date shares at POP Index index
4/13/99 9,425 10,000 10,000
5/30/99 10,765 10,146 10,000
6/30/99 11,452 10,760 10,000
7/31/99 11,297 11,098 10,030
8/31/99 10,743 11,022 10,090
9/30/99 10,299 10,949 10,187
10/31/99 9,945 10,922 10,303
11/30/99 10,277 11,545 10,439
12/31/99 10,796 13,585 10,602
1/31/00 10,529 15,728 10,787
2/29/00 $11,141 $13,490 $10,229
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $11,752 ($11,252 with the contingent deferred sales charge)
and the fund's class C shares would have been valued at $11,748 ($11,648
with the contingent deferred sales charge). See first page of performance
section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION PERIOD ENDED 2/29/00
Class A Class B Class C
- ----------------------------------------------------------------------
Distributions (number) 1 1 1
- ----------------------------------------------------------------------
Short-term capital gains $0.036 $0.036 $0.036
- ----------------------------------------------------------------------
Total $0.036 $0.036 $0.036
- ----------------------------------------------------------------------
Share value: NAV POP NAV NAV
- ----------------------------------------------------------------------
4/13/99 $8.50 $9.02 -- --
- ----------------------------------------------------------------------
5/3/99 1 -- -- $9.35 --
- ----------------------------------------------------------------------
7/26/99 2 -- -- -- $10.23
- ----------------------------------------------------------------------
2/29/00 10.01 10.62 9.95 9.97
- ----------------------------------------------------------------------
1Inception of class B shares.
2Inception of class C shares.
TOTAL RETURN FOR PERIODS ENDED 3/31/00 (most recent calendar quarter)
Class A Class B Class C
(inception dates) (4/13/99) (5/3/99) (7/26/99)
NAV POP NAV CDSC NAV CDSC
- -------------------------------------------------------------------------
Life of fund 22.60% 15.53% 21.89% 16.89% 21.84% 20.84%
- -------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost. 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.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are subject
to a contingent deferred sales charge only if the shares are redeemed
during the first year.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 5.75% maximum sales charge for class A
shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B or C shares and assumes redemption at the end of
the period. Your fund's class B 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. The CDSC for class C shares is 1% for one year after
purchase.
Comparative benchmarks
Russell 2000(R) Index measures the performance of the 2,000 smallest
companies in the Russell 3000 Index, which represents approximately 11% of
the total market capitalization of the Russell 3000 Index. As of the
latest reconstitution, the average market capitalization was approximately
$592.0 million; the median market capitalization was approximately $500.0
million. Securities indexes assume reinvestment of all distributions and
interest payments and do not take in 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.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
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 noninvestment 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-end funds, a separate
table is provided for each share class.
Report of independent accountants
For the period ended February 29, 2000
To the Trustees of Putnam Investment Funds and
Shareholders of Putnam Small Cap Value Fund
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 Small Cap Value
Fund (the "fund") at February 29, 2000, and the results of its operations,
the changes in its net assets and the financial highlights for the period
from April 13, 1999 (commencement of operations) through February 29,
2000, in conformity with accounting principles generally accepted in the
United States. 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 audit. We conducted our audit of
these financial statements in accordance with auditing standards generally
accepted in the United States, 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 audit, which
included confirmation of investments owned at February 29, 2000 by
correspondence with the custodian, provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 7, 2000
<TABLE>
<CAPTION>
The fund's portfolio
February 29, 2000
COMMON STOCKS (99.0%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Advertising and Marketing Services (0.8%)
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31,100 Harte-Hanks, Inc. $ 678,369
12,367 True North Communications, Inc. 457,579
--------------
1,135,948
Aerospace/Defense (3.2%)
- --------------------------------------------------------------------------------------------------------------------------
63,944 AAR Corp. 1,518,670
10,400 Alliant Techsystems, Inc. (NON) 562,900
37,983 Aviall, Inc. (NON) 310,986
40,010 Cordant Technologies, Inc. 1,295,324
31,000 Primex Technologies, Inc. 651,000
18,705 Triumph Group, Inc. (NON) 547,121
--------------
4,886,001
Airlines (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
21,131 Midwest Express Holdings, Inc. (NON) 545,444
Automotive (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
17,964 Borg-Warner Automotive, Inc. 574,848
19,800 Carlisle Companies, Inc. 655,875
41,460 CLARCOR, Inc. 805,879
28,600 Midas, Inc. 686,400
34,294 Tower Automotive, Inc. (NON) 407,241
44,457 Wynn's International, Inc. 591,834
--------------
3,722,077
Banking (6.3%)
- --------------------------------------------------------------------------------------------------------------------------
19,639 AMCORE Financial, Inc. 411,192
58,356 Bank United Corp. Class A 1,528,177
65,220 Centennial Bancorp 644,048
23,700 City National Corp. 653,231
48,090 Commercial Federal Corp. 622,164
27,072 First Midwest Bancorp, Inc. 675,108
30,950 Hudson United Bancorp 624,803
23,622 Imperial Bancorp 608,255
63,926 Peoples Heritage Financial Group, Inc. 679,214
49,502 Provident Bankshares Corp. 798,220
38,757 SouthWest Bancorporation of Texas, Inc. (NON) 707,315
64,245 Sovereign Bancorp, Inc. 465,776
61,399 Sterling Bancshares, Inc. 583,291
26,841 Webster Financial Corp. 567,016
--------------
9,567,810
Beverage (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
16,678 Robert Mondavi Corp. (The) (NON) 610,832
Biotechnology (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
18,200 Serologicals Corp. (NON) 204,750
Building Materials (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
116,730 Apogee Enterprises, Inc. 539,876
Chemicals (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
56,087 Airgas, Inc. (NON) 389,104
64,328 CK Witco Corp. 683,485
39,700 Delta & Pine Land Co. 712,119
37,449 Ferro Corporation 706,850
120,641 Hanna (M.A.) Co. 1,379,831
77,312 Mississippi Chemical Corp. 579,840
147,645 Omnova Solutions, Inc. 968,920
--------------
5,420,149
Commercial and Consumer Services (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
28,688 ABM Industries, Inc. 722,579
25,000 ADVO, Inc. (NON) 693,750
62,936 Bowne & Co. 751,299
35,100 G & K Services, Inc. Class A 596,700
29,100 RemedyTemp, Inc. (NON) 647,475
7,600 Staffmark, Inc. (NON) 85,500
44,900 Tuboscope, Inc. 749,269
--------------
4,246,572
Communications Equipment (3.5%)
- --------------------------------------------------------------------------------------------------------------------------
9,000 ADTRAN, Inc. (NON) 662,063
44,937 Communications Systems, Inc. 808,866
142,207 IFR Systems, Inc. (NON) 1,262,087
26,000 Inter-Tel, Inc. 1,020,500
42,900 Performance Technologies, Inc. (NON) 871,406
54,693 Superior TeleCom, Inc. 683,663
--------------
5,308,585
Computers (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
55,157 Gerber Scientific, Inc. 923,880
55,809 Mentor Graphics Corp. (NON) 955,729
--------------
1,879,609
Conglomerates (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
107,301 GenCorp, Inc. 838,289
23,600 Teleflex, Inc. 666,700
--------------
1,504,989
Consumer Goods (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
26,205 AptarGroup, Inc. 627,282
23,360 Chattem, Inc. (NON) 420,480
23,572 Lancaster Colony Corp. 701,267
23,467 Oneida Ltd. 416,539
--------------
2,165,568
Distribution (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
20,900 Performance Food Group Co. (NON) 496,375
60,700 U.S. Foodservice (NON) 1,073,631
--------------
1,570,006
Electrical Equipment (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
65,383 BE Aerospace, Inc. (NON) 580,274
36,000 BEI Technologies, Inc. 693,000
14,257 C&D Technologies, Inc. 666,515
23,355 Lincoln Electric Holdings, Inc. 455,423
28,800 Thomas & Betts Corp. 646,200
--------------
3,041,412
Electronics (10.7%)
- --------------------------------------------------------------------------------------------------------------------------
13,601 Avnet, Inc. 909,567
29,823 Belden, Inc. 674,745
172,364 General Cable Corp. 1,723,640
28,895 International Rectifier Corp. (NON) 1,209,978
32,100 Intervoice-brite, Inc. (NON) 1,159,613
33,156 Kent Electronics Corp. (NON) 1,123,160
33,265 Littlelfuse, Inc. (NON) 993,792
30,600 Methode Electronics, Inc. 1,778,625
34,000 Park Electrochemical Corp. 773,500
71,936 Pioneer-Standard Electronics, Inc. 1,321,824
70,700 Recoton Corp. (NON) 985,381
11,872 Tektronix, Inc. 688,576
15,000 Varian Medical Systems, Inc. 599,063
16,846 Vishay Intertechnology, Inc. (NON) 724,378
123,894 X-Rite, Inc. 1,486,728
--------------
16,152,570
Energy (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
21,900 GulfMark Offshore, Inc. (NON) 291,544
25,275 Helmerich & Payne, Inc. 672,947
38,035 National-Oilwell, Inc. (NON) 922,349
77,757 Newpark Resources, Inc. (NON) 607,477
28,562 Pride International, Inc. (NON) 423,075
34,801 Tidewater, Inc. 985,303
--------------
3,902,695
Engineering & Construction (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
15,300 Ameron International Corp. 533,588
14,105 Texas Industries, Inc. 423,150
--------------
956,738
Food (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
48,200 Earthgrains Co. (The) 723,000
102,455 International Multifoods Corp. 1,120,602
19,400 Michael Foods, Inc. 424,375
32,155 Smithfield Foods, Inc. (NON) 498,403
75,268 United Natural Foods, Inc. 776,201
35,067 Universal Foods Corp. 633,398
--------------
4,175,979
Gaming & Lottery (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
30,457 Dover Downs Entertainment, Inc. 432,109
26,000 Station Casinos, Inc. (NON) 510,250
--------------
942,359
Health Care Services (7.8%)
- --------------------------------------------------------------------------------------------------------------------------
64,741 AmeriSource Health Corp. Class A (NON) 942,791
45,800 Bindley Western Industries, Inc. 787,188
79,566 Conventry Health Care, Inc. (NON) 651,447
36,701 Invacare Corp. 894,587
101,021 Matria Healthcare, Inc. (NON) 618,754
162,110 Omnicare, Inc. 1,489,386
47,700 Orthodontic Centers of America, Inc. (NON) 825,806
3,500 Patterson Dental Co. (NON) 126,109
46,733 Per-Se Technologies, Inc. (NON) 368,022
74,700 PSS World Medical, Inc. (NON) 480,881
58,903 Quorum Health Group, Inc. (NON) 524,605
10,100 Renal Care Group, Inc. (NON) 177,381
14,100 Shared Medical Systems Corp. 549,019
25,378 Trigon Healthcare, Inc. (NON) 810,510
126,055 United Wisconsin Services 732,695
19,315 Universal Health Services, Inc. (NON) 750,871
114,647 US Oncology, Inc. (NON) 472,919
27,039 Vital Signs, Inc. 626,967
--------------
11,829,938
Homebuilding (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
37,278 Lennar Corp. 615,087
Household Furniture and Appliances (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
13,100 Bassett Furniture Industries, Inc. 176,850
40,514 Windmere-Durable Holdings, Inc. (NON) 607,710
--------------
784,560
Insurance (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
16,233 Amerus Life Holdings, Inc. Class A 329,733
38,825 Berkley (W.R.) Corp. 623,627
44,000 Commerce Group, Inc. 1,314,500
61,026 Ehhance Financial Services Group, Inc. 717,056
37,205 FBL Financial Group, Inc. Class A 599,931
98,426 Fremont General Corp. 713,589
42,000 Horace Mann Educators Corp. 651,000
37,550 Presidential Life Corp. 586,719
--------------
5,536,155
Investment Banking/Brokerage (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
18,500 Waddell & Reed Financial, Inc. 535,344
Machinery (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
88,335 DT Industries, Inc. 1,137,313
40,133 Gardner Denver, Inc. (NON) 762,527
34,796 JLK Direct Distribution, Inc. (NON) 380,581
15,400 Kaydon Corp. 354,200
48,000 Milacron, Inc. 666,000
51,300 MSC Industrial Direct Co., Inc. Class A (NON) 801,563
29,900 Regal-Beloit Corp. 532,594
29,305 Westinghouse Air Brake Co. 278,398
--------------
4,913,176
Manufacturing (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
57,209 ABC -- NACO, Inc. 718,688
30,533 Applied Power, Inc. 738,517
18,500 Pentair, Inc. 635,938
20,805 Roper Industries, Inc. 566,936
15,600 Tennant Co. 499,200
34,400 UCAR International, Inc. (NON) 524,600
--------------
3,683,879
Medical Technology (4.2%)
- --------------------------------------------------------------------------------------------------------------------------
19,831 Arrow International, Inc. 783,325
13,143 Beckman Coulter, Inc. 632,507
29,600 Diagnostic Products Corp. 680,800
29,757 Haemonetics Corp. (NON) 708,589
23,368 Mentor Corp. 648,462
91,873 Meridian Diagnostics, Inc. 884,278
138,707 Owens & Minor, Inc. 1,525,777
17,578 Wesley Jessen VisionCare, Inc. (NON) 505,368
--------------
6,369,106
Metals (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
20,349 Carpenter Technology Corp. 452,765
36,100 Material Sciences Corp. (NON) 521,194
31,543 Quanex Corp. 672,260
24,957 Reliance Steel & Aluminum Co. 483,542
--------------
2,129,761
Natural Gas Utilities (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
30,200 AGL Resources, Inc. 515,288
Office Equipment & Supplies (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
32,900 Falcon Products, Inc. 370,125
33,968 HON INDUSTRIES, Inc. 626,285
46,049 Standard Register Co. (The) 627,418
25,000 United Stationers, Inc. 671,875
59,433 Wallace Computer Services, Inc. 620,332
--------------
2,916,035
Oil & Gas (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
44,783 Basin Exploration, Inc. (NON) 473,020
15,930 Devon Energy Corp. 593,393
20,800 Newfield Exploration Co. (NON) 644,800
147,000 Range Resources Corp. 284,813
24,270 St. Mary Land & Exploration Co. 675,009
--------------
2,671,035
Paper & Forest Products (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
34,902 Albany International Corp. 506,079
38,200 BWAY Corp. (NON) 257,850
30,705 Caraustar Industries, Inc. 510,471
23,033 Ivex Packaging Corp. (NON) 174,187
49,607 Wausau-Mosinee Paper Corp. 647,991
--------------
2,096,578
Pharmaceuticals (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
17,546 Cambrex Corp. 704,033
Photography/Imaging (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
106,145 BMC Industries, Inc. 583,798
19,000 Imation Corp. (NON) 587,813
29,750 Polaroid Corp. 745,609
--------------
1,917,220
Publishing (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
11,843 McClatchy Co. (The) 409,324
Real Estate (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
21,052 LNR Property Corp. 410,514
Restaurants (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
79,828 CBRL Group, Inc. 738,409
28,300 Papa Johns International, Inc. (NON) 679,200
--------------
1,417,609
Retail (5.7%)
- --------------------------------------------------------------------------------------------------------------------------
28,819 Aaron Rents, Inc. 432,285
116,237 Baker (J.), Inc. 653,833
63,700 Claire's Stores, Inc. 1,110,769
35,183 Coldwater Creek, Inc. (NON) 637,692
90,900 Flooring America, Inc. (NON) 488,588
86,596 Heilig-Meyers Co. 281,437
109,300 J. Jill Group, Inc. (NON) 382,550
25,200 Lands' End, Inc. (NON) 836,325
64,489 Petco Animal Supplies, Inc. (NON) 693,257
189,930 Pier 1 Imports, Inc. 1,661,888
44,070 Regis Corp. 683,085
50,600 Ruddick Corp. 679,938
--------------
8,541,647
Semiconductor (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
16,115 DuPont Photomasks, Inc. (NON) 942,728
41,863 Genrad, Inc. (NON) 617,479
--------------
1,560,207
Shipping (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
30,612 Circle International Group, Inc. 748,081
50,700 Fritz Companies, Inc. (NON) 424,613
11,205 USFreightways Corp. 372,566
48,773 Wabash National Corp. 682,822
--------------
2,228,082
Software (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
18,000 Hyperion Solutions Corp. (NON) 888,750
40,000 JDA Software Group, Inc. (NON) 810,000
32,000 Phoenix Technologies Ltd. (NON) 914,000
11,800 Project Software & Development, Inc. (NON) 913,763
--------------
3,526,513
Technology Services (6.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,800 American Management Systems (NON) 89,075
52,366 Analysts International Corp. 693,850
27,000 CACI International, Inc. (NON) 767,813
17,519 Cambridge Technology Partners, Inc. (NON) 262,785
31,300 Ciber, Inc. (NON) 727,725
38,310 Computer Task Group, Inc. 490,847
39,000 Davox Corp. (NON) 1,491,750
37,692 FileNET Corp. (NON) 1,613,689
16,400 Keane, Inc. (NON) 393,600
91,643 MTS Systems Corp. 704,506
19,600 National Data Corp. 607,600
64,861 Telxon Corp. 1,394,512
--------------
9,237,752
Telephone (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
11,500 CT Communications, Inc. 638,250
Textiles (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
50,900 Culp, Inc. 311,763
75,918 Wolverine World Wide, Inc. 873,057
--------------
1,184,820
Toys (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
58,845 Racing Champions Corp. (NON) 191,246
Waste Management (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
85,509 Safety-Kleen Corp. (NON) 416,856
--------------
Total Common Stocks (cost $144,943,960) $ 149,459,984
SHORT-TERM INVESTMENTS (1.8%) (a) (cost $2,745,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$2,745,000 Interest in $700,000,000 joint repurchase agreement
dated February 29, 2000 with S.B.C. Warburg Inc.
due March 1, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $2,745,440 for an
effective yield of 5.77% $ 2,745,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $147,688,960) (b) $ 152,204,984
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $151,028,485.
(b) The aggregate identified cost on a tax basis is $148,796,837, resulting in gross unrealized appreciation and
depreciation of $22,343,256 and $18,935,109, respectively, or net unrealized appreciation of $3,408,147.
(NON) Non-income-producing security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
February 29, 2000
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $147,688,960) (Note 1) $152,204,984
- -----------------------------------------------------------------------------------------------
Cash 734
- -----------------------------------------------------------------------------------------------
Dividends receivable 126,145
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,056,140
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 899,823
- -----------------------------------------------------------------------------------------------
Total assets 155,287,826
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 3,466,962
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 368,946
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 246,180
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 30,958
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 726
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,004
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 79,878
- -----------------------------------------------------------------------------------------------
Other accrued expenses 64,687
- -----------------------------------------------------------------------------------------------
Total liabilities 4,259,341
- -----------------------------------------------------------------------------------------------
Net assets $151,028,485
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1, 4 and 5) $146,585,041
- -----------------------------------------------------------------------------------------------
Distributions in excess of net realized gain on investments (Note 1) (72,580)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,516,024
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $151,028,485
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($83,844,848 divided by 8,379,088 shares) $10.01
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $10.01)* $10.62
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($59,223,678 divided by 5,949,325 shares)** $9.95
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($7,959,959 divided by 798,154 shares)** $9.97
- -----------------------------------------------------------------------------------------------
* 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
For the period April 13, 1999 (commencement of operations) to February 29, 2000
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends $828,357
- -----------------------------------------------------------------------------------------------
Interest 82,648
- -----------------------------------------------------------------------------------------------
Total investment income 911,005
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 554,477
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 210,205
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,043
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,602
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 104,954
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 253,894
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 21,838
- -----------------------------------------------------------------------------------------------
Reports to shareholders 22,814
- -----------------------------------------------------------------------------------------------
Registration fees 49,641
- -----------------------------------------------------------------------------------------------
Auditing 26,620
- -----------------------------------------------------------------------------------------------
Legal 4,086
- -----------------------------------------------------------------------------------------------
Postage 11,880
- -----------------------------------------------------------------------------------------------
Other 12,165
- -----------------------------------------------------------------------------------------------
Total expenses 1,282,219
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (10,699)
- -----------------------------------------------------------------------------------------------
Net expenses 1,271,520
- -----------------------------------------------------------------------------------------------
Net investment loss (360,515)
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 702,286
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 4,516,024
- -----------------------------------------------------------------------------------------------
Net gain on investments 5,218,310
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $4,857,795
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
For the period April 13, 1999
(commencement of operations)
to February 29, 2000
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment loss $ (360,515)
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 702,286
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,516,024
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,857,795
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (236,240)
- ---------------------------------------------------------------------------------------------------------------
Class B (160,533)
- ---------------------------------------------------------------------------------------------------------------
Class C (17,578)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 144,586,041
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 149,029,485
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period (Note 5) 1,999,000
- ---------------------------------------------------------------------------------------------------------------
End of period $151,028,485
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share April 13, 1999+
operating performance to February 29
- ------------------------------------------------------------------------------------------------------------------------------
2000
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.50
- ------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (c) (.01)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.56
- ------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.55
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments (.04)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (.04)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.01
- ------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 18.23*
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $83,845
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.38*
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.20)*
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 41.58*
- ------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset and brokerage service arrangements (Note 2).
(c) Per share net investment 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
- ------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share May 3, 1999+
operating performance to February 29
- ------------------------------------------------------------------------------------------------------------------------------
2000
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $9.35
- ------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (c) (.07)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments .71
- ------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .64
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments (.04)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (.04)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.95
- ------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.84*
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $59,224
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.91*
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.81)*
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 41.58*
- ------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset and brokerage service arrangements (Note 2).
(c) Per share net investment 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 C
- ------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 26, 1999+
operating performance to February 29
- ------------------------------------------------------------------------------------------------------------------------------
2000
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $10.23
- ------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (c) (.05)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (.17)
- ------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.22)
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments (.04)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (.04)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.97
- ------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.16)*
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,960
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.38*
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.57)*
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 41.58*
- ------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset and brokerage service arrangements (Note 2).
(c) Per share net investment loss has been determined on the basis of the weighted average number of shares outstanding during
the period.
</TABLE>
Notes to financial statements
February 29, 2000
Note 1
Significant accounting policies
Putnam Small Cap Value Fund (the "fund") is one of a series of Putnam
Investment Funds (the "trust") which is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-ended management
investment company. The fund seeks capital appreciation by investing
primarily in common stocks of small companies which Putnam Investment
Management, Inc. ("Putnam Management"), the fund's manager, a wholly-owned
subsidiary of Putnam Investments, Inc. believes are currently undervalued.
The fund offers class A, class B and class C shares. The fund began
offering class B shares on May 3, 1999, and class C shares on July 26,
1999. On March 28, 2000 the fund began offering 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 C
shares are subject to the same fees and expenses as class B shares, except
that class C shares have a one-year 1.00% contingent deferred sales charge
and do not convert to 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 as 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
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 sales price on its principal exchange, or if no sales are
reported -- as in the case of some securities traded over-the-counter --
the last reported bid price. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value.
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 Management. 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.
E) 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 period ended
February 29, 2000, the fund had no borrowings against the line of credit.
F) 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.
G) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. The amount and character of income and gains
to be distributed are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences include temporary and permanent differences of losses on wash
sale transactions and net operating loss. 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 period ended February 29, 2000, the fund reclassified
$360,515 to decrease accumulated net investment loss and increase
distributions in excess of net realized gain $360,515. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
H) 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.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.80% of the first $500
million of average net assets, 0.70% of the next $500 million, 0.65% of
the next $500 million, 0.60% of the next $5 billion, 0.575% of the next $5
billion, 0.555% of the next $5 billion, 0.54% of the next $5 billion and
0.53% thereafter.
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 Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the period ended February 29, 2000, fund expenses were reduced by
$10,699 under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $606 has
been allocated to the fund, and an additional fee for each Trustees
meeting attended. 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 a 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 C 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 C shares,
respectively. The Trustees have approved payment by the fund to an annual
rate of 0.25%, 1.00% and 1.00% of the average net assets attributable to
class A, class B and class C shares, respectively.
For the period ended February 29, 2000, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $184,147 from the sale of class
A shares, and received $40,555 and $2,566 in contingent deferred sales
charges from redemptions of class B and class C shares, respectively. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the period ended February 29, 2000, Putnam Mutual
Funds Corp., acting as underwriter received $485 on class A redemptions.
Note 3
Purchases and sales of securities
During the period ended February 29, 2000, purchases and sales of
investment securities other than short-term investments aggregated
$178,180,426 and $33,938,752, respectively. There were no purchases or
sales of U.S. government obligations.
Note 4
Capital shares
At February 29, 2000, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
For the period April 13, 1999
(commencement of operations)
to February 29, 2000
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 10,669,194 $103,159,610
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 25,137 229,502
- -----------------------------------------------------------------------------
10,694,331 103,389,112
Shares
repurchased (2,550,419) (24,422,329)
- -----------------------------------------------------------------------------
Net increase 8,143,912 $ 78,966,783
- -----------------------------------------------------------------------------
For the period May 3, 1999
(commencement of operations)
to February 29, 2000
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 6,998,249 $67,914,848
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 16,219 147,594
- -----------------------------------------------------------------------------
7,014,468 68,062,442
Shares
repurchased (1,065,143) (10,063,380)
- -----------------------------------------------------------------------------
Net increase 5,949,325 $57,999,062
- -----------------------------------------------------------------------------
For the period July 26, 1999
(commencement of operations)
to February 29, 2000
- -----------------------------------------------------------------------------
Class C Shares Amount
- -----------------------------------------------------------------------------
Shares sold 848,441 $8,095,191
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,634 14,881
- -----------------------------------------------------------------------------
850,075 8,110,072
Shares
repurchased (51,921) (489,876)
- -----------------------------------------------------------------------------
Net increase 798,154 $7,620,196
- -----------------------------------------------------------------------------
Note 5
Initial capitalization and
offering of shares
The trust was established as a Massachusetts business trust on October 31,
1994. During the period October 31, 1994 to April 13, 1999, the fund had
no operations other than those related to organizational matters,
including the initial capital contribution of $1,999,000 and the issuance
of 235,176 class A shares to Putnam Mutual Funds Corp., a wholly-owned
subsidiary of Putnam Investments, Inc. on April 12, 1999.
At February 29, 2000, Putnam Investments, Inc. owned 422,667 class A
shares of the fund (5.00% of class A shares outstanding), valued at
$4,230,897.
Federal tax information
(Unaudited)
The Form 1099 you receive in January 2001 will show the tax status of all
distributions paid to your account in calendar 2000.
The fund has designated 56.94% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
Welcome to www.putnaminv.com
Now you can use your PC to get up-to-date information about your funds, learn
more about investing and retirement planning, and access market news and
economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term performance
* your current account value, portfolio value and transaction history
* the latest on new funds and other Putnam news
You can also read Putnam economist Dr. Robert Goodman's commentary and
Putnam's Capital Markets outlook, search for a particular fund by name or
objective, use our glossary to decode investment terms . . . and much more.
The site can be accessed through any of the major online services (America
Online, CompuServe, Prodigy) that offer web access. Of course, you can also
access it via Netscape or Microsoft Internet Explorer, using an independent
Internet service provider.
New features will be added to the site regularly. So be sure
to bookmark us at http://www.putnaminv.com
THE PUTNAM FAMILY OF FUNDS
The following is a complete list of Putnam's open-end mutual funds. Please call
your financial advisor or Putnam at 1-800-225-1581 to obtain a prospectus for
any Putnam fund. It contains more complete information, including charges and
expenses. Please read it carefully before you invest or send money.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Century Growth Fund [DBL. DAGGER]
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
TAX-FREE INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund **
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK] **
California, New York
ASSET ALLOCATION FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Diversified Income Trust II
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
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
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Edward T. Shadek, Jr.
Vice President and Fund Manager
Jeffrey W. Netols
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 Small Cap
Value 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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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PUTNAM
INVESTMENTS
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For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN069 59729 2MF 4/00
