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| UNITED STATES
SECURITIES AND EXCHANGE COMMISSION |
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| CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
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| Investment Company Act file number: | (811-05346) |
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| Exact name of registrant as specified in charter: | Putnam Variable Trust |
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| Address of principal executive offices: | One Post Office Square, Boston, Massachusetts 02109 |
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| Name and address of agent for service: | Robert T. Burns, Vice President
One Post Office Square
Boston, Massachusetts 02109 |
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| Copy to: | John W. Gerstmayr, Esq.
Ropes & Gray LLP
800 Boylston Street
Boston, Massachusetts 02199-3600 |
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| Registrant’s telephone number, including area code: | (617) 292-1000 |
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| Date of fiscal year end: | December 31, 2013 |
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| Date of reporting period: | January 1, 2013 — June 30, 2013 |
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Item 1. Report to Stockholders: | |
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| The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940: | |
Message from the Trustees
Dear Fellow Shareholder:
Stock markets around the world have exhibited volatility recently, as the U.S. Federal Reserve indicated that it may begin to reduce its quantitative easing program later this year if current positive trends continue. With this news, long-term interest rates jumped from historic lows and stocks fell, with the U.S. equity market in June posting a monthly loss for the first time this year. International markets, facing a range of issues, also declined.
While the Fed’s announcement initially made investors skittish, we are encouraged that the central bank is seeing steady economic growth and low inflation. These conditions have helped lift equity market averages to near all-time highs, and a continuation of current trends could be supportive for investments. The Fed has said that any tapering will be done in a way that does not threaten the economic recovery.
We believe Putnam’s fundamentally oriented investment approaches are well suited for today’s market environment. By conducting in-depth company and industry research, and through astute analysis of key market and policy-related risks, Putnam’s portfolio managers and research analysts are committed to finding the most attractive opportunities for investors. Integrating new thinking into time-tested strategies may prove particularly beneficial as the economy moves into the next stage of the current recovery.
We believe that, when combined with the guidance of a financial advisor who can help you develop a portfolio that matches your individual goals and tolerance for risk, Putnam’s emphasis on innovative thinking, active investing, and risk management can serve shareholders well.
We would like to extend a welcome to new shareholders of the fund and to thank you for investing with Putnam.
Performance summary (as of 6/30/13)
Investment objective
Capital growth and current income
Net asset value June 30, 2013
| |
| Class IA: $17.91 | Class IB: $17.79 |
|
Total return at net asset value
| | | |
| | | | Russell 1000 |
| (as of 6/30/13)† | Class IA shares* | Class IB shares* | Value Index |
|
| 6 months | 15.67% | 15.47% | 15.90% |
|
| 1 year | 29.96 | 29.57 | 25.32 |
|
| 5 years | 58.25 | 56.27 | 38.11 |
| Annualized | 9.62 | 9.34 | 6.67 |
|
| Life | 149.82 | 143.68 | 128.22 |
| Annualized | 9.42 | 9.16 | 8.45 |
|
For a portion of the periods, the fund had expense limitations, without which returns would have been lower.
* Class inception date: May 1, 2003.
† Recent performance may have benefited from one or more legal settlements.
Russell 1000 Value Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their value orientation.
Data represent past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate, and you may have a gain or a loss when you sell your shares. Performance information does not reflect any deduction for taxes a shareholder may owe on fund distributions or on the redemption of fund shares. All total return figures are at net asset value and exclude contract charges and expenses, which are added to the variable annuity contracts to determine total return at unit value. Had these charges and expenses been reflected, performance would have been lower. For more recent performance, contact your variable annuity provider who can provide you with performance that reflects the charges and expenses at your contract level.
Allocations are represented as a percentage of the fund’s net assets. Short-term investments and net other assets, if any, represent the market value weights of cash, derivatives, short-term securities, and other unclassified assets in the portfolio. Summary information may differ from the portfolio schedule included in the financial statements due to the inclusion of derivative securities, any interest accruals, the exclusion of as-of trades, if any, and the use of different classifications of securities for presentation purposes. Holdings and allocations may vary over time.
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| Putnam VT Equity Income Fund 1 |
Report from your fund’s manager
How would you describe the investment environment for the six months ended June 30, 2013?
Despite a late-in-the-period pullback driven mostly by fears of rising interest rates, it was an especially strong period for equities. The U.S. stock market continued its rally through most of the period, with many of the major market indexes reaching new milestones. Also notable during the period was a shift in performance between cyclical and defensive stocks. For some time, investors had been favoring the perceived “safe havens” of defensive stocks. Even while the equity market was rallying in 2012, defensive stocks were outperforming, which is not a typical response. During the past six months, however, stocks in cyclical sectors — those that tend to move in rhythm with the economy —started to outperform. I believe this shift was a reflection of generally improving macroeconomic conditions, driven in part by more encouraging news on the U.S. employment and housing fronts, which helped boost equity investors’ sentiments toward more risk-taking.
How did the fund perform in this environment?
The portfolio’s pro-cyclical bias was beneficial and helped support the fund’s solid double-digit gain for the semiannual period. This return was roughly in line with that of the fund’s benchmark, the Russell 1000 Value Index. Another interesting aspect of this recent shift toward cyclical stocks involved the importance of cash flow to company performance. Companies with high free-cash-flow yields have outperformed those with weaker free-cash-flow yields. At the same time, companies with high dividend yields have underperformed. As cash flow became preferred over dividend yield, cyclical sectors benefited, particularly industrials, financials, and information technology. Among the highest dividend-yielding stocks, those in defensive sectors such as consumer staples, utilities, and telecommunications were weakest. Our tilt toward pro-cyclical stocks, including opportune security selection in the financials, materials, and industrials sectors, gave the fund a leg up.
The universe of dividend-paying companies seems to be expanding. What can you tell us about that?
Historically, dividend-paying stocks were almost exclusively those in defensive and “bond-like” sectors, such as telecommunications and utilities. Over the past few years, however, there has indeed been a significant expansion in the universe of companies with that ability and willingness to return cash to their shareholders in the form of dividends. In my estimation, about four of every five companies in the S&P 500 are currently paying dividends and, more importantly, the practice now extends beyond the defensive sectors. For example, many technology companies — typically known for using free cash flows for reinvestment — have initiated or increased dividends. In fact, even in today’s rising-interest-rate environment, which ordinarily might taper demand for dividend-paying stocks, I’d estimate that six or seven of the broader market’s 10 sectors are following this trend.
What is your outlook for the second half of 2013?
As an equity investor, I have been pleased with the performance of the market and the improvement in investor sentiment. However, given the speed with which stocks have advanced and the recent introduction of increased interest-rate volatility, I would describe my outlook as cautious for the short term. Yes, we have seen slow, but gradual, economic expansion in the United States. Investors seemed less distracted by ongoing recessionary pressures in Europe, U.S. fiscal challenges, and decelerating growth in China. But, investors have also been concerned about the risks associated with the tapering of the federal government’s monetary stimulus regime and the expected rise in interest rates. On the whole, however, I believe interest-rate worries are a short-term phenomenon, and my longer-term outlook remains constructive for equity investing.
The views expressed in this report are exclusively those of Putnam Management and are subject to change. They are not meant as investment advice. Please note that the holdings discussed in this report may not have been held by the fund for the entire period. Portfolio composition is subject to review in accordance with the fund’s investment strategy and may vary in the future.
Consider these risks before investing: Value stocks may fail to rebound, and the market may not favor value-style investing. Income provided by the fund may be reduced by changes in the dividend policies of, and the capital resources available at, the companies in which the fund invests. Stock prices may fall or fail to rise over time for several reasons, including general financial market conditions and factors related to a specific issuer or industry. You can lose money by investing in the fund.
Your fund’s managers
Portfolio Manager Darren A. Jaroch is a CFA charterholder. He joined Putnam in 1999 and has been in the investment industry since 1996.
In addition to Darren, your fund is also managed by Assistant Portfolio Manager Walter D. Scully.
Your fund’s managers may also manage other accounts advised by Putnam Management or an affiliate, including retail mutual fund counterparts to the funds in Putnam Variable Trust.
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| 2 Putnam VT Equity Income Fund |
Understanding your fund’s expenses
As an investor in a variable annuity product that invests in a registered investment company, you pay ongoing expenses, such as management fees, distribution fees (12b-1 fees), and other expenses. Using the following information, you can estimate how these expenses affect your investment and compare them with the expenses of other funds. You may also pay one-time transaction expenses, which are not shown in this section and would result in higher total expenses. Charges and expenses at the insurance company separate account level are not reflected. For more information, see your fund’s prospectus or talk to your financial representative.
Review your fund’s expenses
The first two columns in the following table show the expenses you would have paid on a $1,000 investment in your fund from January 1, 2013, to June 30, 2013. They also show how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses. To estimate the ongoing expenses you paid over the period, divide your account value by $1,000, then multiply the result by the number in the first line for the class of shares you own.
Compare your fund’s expenses with those of other funds
The two right-hand columns of the table show your fund’s expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total costs) of investing in the fund with those of other funds. All shareholder reports of mutual funds and funds serving as variable annuity vehicles will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period.
| | | | |
| | Expenses and value for a | Expenses and value for a |
| | $1,000 investment, assuming | $1,000 investment, assuming a |
| | actual returns for the 6 months | hypothetical 5% annualized return |
| | ended 6/30/13 | | for the 6 months ended 6/30/13 |
|
| |
| | Class IA | Class IB | Class IA | Class IB |
|
| |
| Expenses paid | | | | |
| per $1,000* | $3.37 | $4.70 | $3.16 | $4.41 |
|
| |
| Ending value | | | | |
| (after expenses) | $1,156.70 | $1,154.70 | $1,021.67 | $1,020.43 |
|
| |
| Annualized | | | | |
| expense ratio | 0.63% | 0.88% | 0.63% | 0.88% |
|
*Expenses for each share class are calculated using the fund’s annualized expense ratio for each class, which represents the ongoing expenses as a percentage of average net assets for the six months ended 6/30/13. The expense ratio may differ for each share class. Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year.
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| Putnam VT Equity Income Fund 3 |
The fund’s portfolio 6/30/13 (Unaudited)
| | |
| COMMON STOCKS (95.7%)* | Shares | Value |
|
| Aerospace and defense (6.1%) | | |
| General Dynamics Corp. | 20,970 | $1,642,580 |
|
| Honeywell International, Inc. | 51,350 | 4,074,109 |
|
| L-3 Communications Holdings, Inc. S | 50,120 | 4,297,289 |
|
| Northrop Grumman Corp. | 106,830 | 8,845,524 |
|
| Raytheon Co. | 56,170 | 3,713,960 |
|
| United Technologies Corp. | 35,490 | 3,298,441 |
|
| | | 25,871,903 |
| Auto components (2.3%) | | |
| Autoliv, Inc. (Sweden) S | 24,050 | 1,861,230 |
|
| Delphi Automotive PLC (United Kingdom) | 75,740 | 3,839,261 |
|
| Johnson Controls, Inc. | 21,630 | 774,138 |
|
| TRW Automotive Holdings Corp. † | 48,420 | 3,217,025 |
|
| | | 9,691,654 |
| Automobiles (0.8%) | | |
| Ford Motor Co. | 214,880 | 3,324,194 |
|
| | | 3,324,194 |
| Beverages (1.7%) | | |
| Coca-Cola Enterprises, Inc. | 118,150 | 4,154,154 |
|
| Dr. Pepper Snapple Group, Inc. | 67,100 | 3,081,903 |
|
| | | 7,236,057 |
| Building products (0.3%) | | |
| Owens Corning, Inc. † | 31,320 | 1,223,986 |
|
| | | 1,223,986 |
| Capital markets (3.5%) | | |
| Charles Schwab Corp. (The) | 179,420 | 3,809,087 |
|
| Invesco, Ltd. | 71,480 | 2,273,064 |
|
| State Street Corp. S | 137,370 | 8,957,898 |
|
| | | 15,040,049 |
| Chemicals (2.5%) | | |
| Ashland, Inc. S | 47,840 | 3,994,640 |
|
| Celanese Corp. Ser. A | 28,250 | 1,265,600 |
|
| LyondellBasell Industries NV Class A | 79,830 | 5,289,536 |
|
| | | 10,549,776 |
| Commercial banks (2.4%) | | |
| Popular, Inc. (Puerto Rico) † | 34,951 | 1,060,064 |
|
| U.S. Bancorp | 121,120 | 4,378,488 |
|
| Wells Fargo & Co. | 118,982 | 4,910,387 |
|
| | | 10,348,939 |
| Commercial services and supplies (1.1%) | | |
| ADT Corp. (The) † S | 54,242 | 2,161,544 |
|
| Tyco International, Ltd. | 71,455 | 2,354,442 |
|
| | | 4,515,986 |
| Communications equipment (1.9%) | | |
| Cisco Systems, Inc. | 331,480 | 8,058,279 |
|
| | | 8,058,279 |
| Computers and peripherals (2.6%) | | |
| Apple, Inc. | 7,040 | 2,788,403 |
|
| EMC Corp. † | 165,650 | 3,912,653 |
|
| SanDisk Corp. † | 69,776 | 4,263,314 |
|
| | | 10,964,370 |
| Consumer finance (0.8%) | | |
| Capital One Financial Corp. S | 27,720 | 1,741,093 |
|
| Discover Financial Services | 32,490 | 1,547,824 |
|
| | | 3,288,917 |
| Containers and packaging (0.3%) | | |
| Sealed Air Corp. | 53,280 | 1,276,056 |
|
| | | 1,276,056 |
| Diversified financial services (7.9%) | | |
| Bank of America Corp. | 206,840 | 2,659,962 |
|
| Citigroup, Inc. | 233,195 | 11,186,364 |
|
| CME Group, Inc. | 76,650 | 5,823,867 |
|
| | |
| COMMON STOCKS (95.7%)* cont. | Shares | Value |
|
| Diversified financial services cont. | | |
| JPMorgan Chase & Co. | 224,130 | $11,831,823 |
|
| McGraw-Hill Cos., Inc. (The) | 35,750 | 1,901,543 |
|
| | | 33,403,559 |
| Diversified telecommunication services (1.9%) | | |
| AT&T, Inc. | 75,520 | 2,673,408 |
|
| CenturyLink, Inc. S | 69,890 | 2,470,612 |
|
| Verizon Communications, Inc. | 55,430 | 2,790,346 |
|
| | | 7,934,366 |
| Electric utilities (2.2%) | | |
| American Electric Power Co., Inc. | 53,570 | 2,398,865 |
|
| Edison International | 25,080 | 1,207,853 |
|
| FirstEnergy Corp. | 73,080 | 2,728,807 |
|
| NextEra Energy, Inc. | 32,850 | 2,676,618 |
|
| PPL Corp. | 7,280 | 220,293 |
|
| | | 9,232,436 |
| Food and staples retail (2.2%) | | |
| CVS Caremark Corp. | 74,090 | 4,236,466 |
|
| Kroger Co. (The) | 58,070 | 2,005,738 |
|
| Walgreen Co. | 69,750 | 3,082,950 |
|
| | | 9,325,154 |
| Food products (1.1%) | | |
| Bunge, Ltd. S | 26,320 | 1,862,666 |
|
| Kraft Foods Group, Inc. | 45,390 | 2,535,939 |
|
| Pinnacle Foods, Inc. † | 11,982 | 289,365 |
|
| | | 4,687,970 |
| Health-care equipment and supplies (4.4%) | | |
| Baxter International, Inc. | 123,120 | 8,528,522 |
|
| Covidien PLC | 72,302 | 4,543,458 |
|
| St. Jude Medical, Inc. S | 64,830 | 2,958,193 |
|
| Zimmer Holdings, Inc. S | 32,860 | 2,462,528 |
|
| | | 18,492,701 |
| Health-care providers and services (3.2%) | | |
| CIGNA Corp. | 135,810 | 9,844,867 |
|
| UnitedHealth Group, Inc. | 59,320 | 3,884,274 |
|
| | | 13,729,141 |
| Household durables (0.2%) | | |
| Taylor Morrison Home Corp. Class A † | 35,230 | 858,907 |
|
| | | 858,907 |
| Independent power producers and energy traders (0.9%) | | |
| Calpine Corp. † | 122,900 | 2,609,167 |
|
| NRG Energy, Inc. | 50,760 | 1,355,292 |
|
| | | 3,964,459 |
| Insurance (8.4%) | | |
| American International Group, Inc. † | 110,170 | 4,924,599 |
|
| Aon PLC | 47,860 | 3,079,791 |
|
| Everest Re Group, Ltd. S | 14,950 | 1,917,487 |
|
| Hartford Financial Services Group, Inc. (The) | 21,230 | 656,432 |
|
| MetLife, Inc. | 227,240 | 10,398,502 |
|
| PartnerRe, Ltd. S | 49,380 | 4,471,853 |
|
| Validus Holdings, Ltd. | 126,713 | 4,576,874 |
|
| Willis Group Holdings PLC S | 38,280 | 1,561,058 |
|
| XL Group PLC | 139,829 | 4,239,615 |
|
| | | 35,826,211 |
| IT Services (0.7%) | | |
| Fidelity National Information Services, Inc. | 64,510 | 2,763,608 |
|
| | | 2,763,608 |
| Leisure equipment and products (0.9%) | | |
| Hasbro, Inc. S | 83,150 | 3,727,615 |
|
| | | 3,727,615 |
| Life sciences tools and services (0.7%) | | |
| Thermo Fisher Scientific, Inc. S | 36,250 | 3,067,838 |
|
| | | 3,067,838 |
|
| 4 Putnam VT Equity Income Fund |
| | |
| COMMON STOCKS (95.7%)* cont. | Shares | Value |
|
| Machinery (0.4%) | | |
| Stanley Black & Decker, Inc. | 22,700 | $1,754,710 |
|
| | | 1,754,710 |
| Media (3.7%) | | |
| Comcast Corp. Special Class A | 256,210 | 10,163,851 |
|
| Time Warner, Inc. | 95,680 | 5,532,218 |
|
| | | 15,696,069 |
| Metals and mining (0.5%) | | |
| Freeport-McMoRan Copper & Gold, Inc. Class B | | |
| (Indonesia) | 82,260 | 2,271,199 |
|
| | | 2,271,199 |
| Multi-utilities (0.5%) | | |
| Ameren Corp. | 61,840 | 2,129,770 |
|
| | | 2,129,770 |
| Oil, gas, and consumable fuels (11.5%) | | |
| Apache Corp. | 16,030 | 1,343,795 |
|
| Chevron Corp. | 1,900 | 224,846 |
|
| Ente Nazionale Idrocarburi (ENI) SpA ADR (Italy) | 26,020 | 1,067,861 |
|
| Exxon Mobil Corp. | 88,110 | 7,960,739 |
|
| Marathon Oil Corp. | 384,300 | 13,289,090 |
|
| Marathon Petroleum Corp. | 98,510 | 7,000,121 |
|
| Noble Energy, Inc. | 23,600 | 1,416,944 |
|
| Occidental Petroleum Corp. | 8,880 | 792,362 |
|
| Royal Dutch Shell PLC ADR (United Kingdom) | 143,183 | 9,135,075 |
|
| Total SA (France) | 16,400 | 799,736 |
|
| Total SA ADR (France) | 10 | 487 |
|
| Valero Energy Corp. | 163,040 | 5,668,901 |
|
| | | 48,699,957 |
| Paper and forest products (0.8%) | | |
| International Paper Co. | 72,990 | 3,234,187 |
|
| | | 3,234,187 |
| Personal products (0.3%) | | |
| Coty, Inc. Class A † S | 66,310 | 1,139,206 |
|
| | | 1,139,206 |
| Pharmaceuticals (7.8%) | | |
| Eli Lilly & Co. | 206,660 | 10,151,139 |
|
| Johnson & Johnson | 112,890 | 9,692,735 |
|
| Merck & Co., Inc. | 104,840 | 4,869,818 |
|
| Pfizer, Inc. | 221,089 | 6,192,703 |
|
| Zoetis, Inc. | 69,683 | 2,152,505 |
|
| | | 33,058,900 |
| Professional services (1.3%) | | |
| Dun & Bradstreet Corp. (The) S | 54,280 | 5,289,586 |
|
| | | 5,289,586 |
| Real estate investment trusts (REITs) (1.8%) | | |
| American Tower Corp. Class A R | 37,070 | 2,712,412 |
|
| Hatteras Financial Corp.R S | 45,010 | 1,109,046 |
|
| MFA Financial, Inc. R | 473,311 | 3,999,478 |
|
| | | 7,820,936 |
| Semiconductors and semiconductor equipment (1.9%) | | |
| Intel Corp. S | 105,850 | 2,563,687 |
|
| KLA-Tencor Corp. | 7,100 | 395,683 |
|
| NXP Semiconductor NV † | 78,280 | 2,425,114 |
|
| Texas Instruments, Inc. | 76,020 | 2,650,817 |
|
| | | 8,035,301 |
| Software (0.7%) | | |
| Oracle Corp. | 59,400 | 1,824,768 |
|
| Symantec Corp. | 52,660 | 1,183,270 |
|
| | | 3,008,038 |
| Specialty retail (0.1%) | | |
| CST Brands, Inc. † S | 18,115 | 558,123 |
|
| | | 558,123 |
| | |
| COMMON STOCKS (95.7%)* cont. | Shares | Value |
|
| Tobacco (1.9%) | | |
| Altria Group, Inc. | 128,330 | $4,490,267 |
|
| Philip Morris International, Inc. | 43,220 | 3,743,716 |
|
| | | 8,233,983 |
| Wireless telecommunication services (1.5%) | | |
| Vodafone Group PLC ADR (United Kingdom) | 228,270 | 6,560,480 |
|
| | | 6,560,480 |
| | | |
| Total common stocks (cost $299,140,213) | | $405,894,576 |
| |
| CONVERTIBLE PREFERRED STOCKS (2.4%)* | Shares | Value |
|
| ArcelorMittal Ser. MTUS, $1.50 cv. pfd. (France) | 19,561 | $365,791 |
|
| PPL Corp. $4.375 cv. pfd. | 105,640 | 5,716,180 |
|
| Swift Mandatory Common Exchange Security Trust | | |
| 144A 6.00% cv. pfd. | 304,888 | 4,219,650 |
|
| Total convertible preferred stocks (cost $10,059,315) | $10,301,621 |
| |
| CONVERTIBLE BONDS AND NOTES (0.8%)* | Principal amount | Value |
|
| MGIC Investment Corp. cv. sr. notes 5s, 2017 | $1,768,000 | $1,802,255 |
|
| WESCO International, Inc. cv. company | | |
| guaranty sr. unsec. notes 6s, 2029 | 624,000 | 1,534,260 |
|
| Total convertible bonds and notes (cost $2,602,461) | $3,336,515 |
| |
| SHORT-TERM INVESTMENTS (11.8%)* | Shares | Value |
|
| Putnam Short Term Investment Fund 0.03% L | 4,104,992 | $4,104,992 |
|
| Putnam Cash Collateral Pool, LLC 0.15% d | 45,816,425 | 45,816,425 |
|
| Total short-term investments (cost $49,921,417) | | $49,921,417 |
| | | |
| Total investments (cost $361,723,406) | | $469,454,129 |
Key to holding’s abbreviations
| |
| ADR | American Depository Receipts: represents ownership of foreign securities on deposit with a custodian bank |
| | |
Notes to the fund’s portfolio
Unless noted otherwise, the notes to the fund’s portfolio are for the close of the fund’s reporting period, which ran from January 1, 2013 through June 30, 2013 (the reporting period). Within the following notes to the portfolio, references to “ASC 820” represent Accounting Standards Codification 820 Fair Value Measurements and Disclosures and references to “OTC”, if any, represent over-the-counter.
* Percentages indicated are based on net assets of $424,181,386.
† Non-income-producing security.
d Affiliated company. See Note 1 to the financial statements regarding securities lending. The rate quoted in the security description is the annualized 7-day yield of the fund at the close of the reporting period.
L Affiliated company (Note 5). The rate quoted in the security description is the annualized 7-day yield of the fund at the close of the reporting period.
R Real Estate Investment Trust.
S Security on loan, in part or in entirety, at the close of the reporting period (Note 1).
Debt obligations are considered secured unless otherwise indicated.
144A after the name of an issuer represents securities exempt from registration under Rule 144A under the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
The dates shown on debt obligations are the original maturity dates.
|
| Putnam VT Equity Income Fund 5 |
ASC 820 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of the fund’s investments. The three levels are defined as follows:
Level 1: Valuations based on quoted prices for identical securities in active markets.
Level 2: Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3: Valuations based on inputs that are unobservable and significant to the fair value measurement.
The following is a summary of the inputs used to value the fund’s net assets as of the close of the reporting period:
| | | |
| | | Valuation inputs | |
|
| Investments in securities: | Level 1 | Level 2 | Level 3 |
|
| Common stocks: | | | |
|
| Consumer discretionary | $33,856,562 | $— | $— |
|
| Consumer staples | 30,622,370 | — | — |
|
| Energy | 47,900,221 | 799,736 | — |
|
| Financials | 105,728,611 | — | — |
|
| Health care | 68,348,580 | — | — |
|
| Industrials | 38,656,171 | — | — |
|
| Information technology | 32,829,596 | — | — |
|
| Materials | 17,331,218 | — | — |
|
| Telecommunication services | 14,494,846 | — | — |
|
| Utilities | 15,326,665 | — | — |
|
| Total common stocks | 405,094,840 | 799,736 | — |
|
| Convertible bonds and notes | — | 3,336,515 | — |
|
| Convertible preferred stocks | — | 10,301,621 | — |
|
| Short-term investments | 4,104,992 | 45,816,425 | — |
|
| Totals by level | $409,199,832 | $60,254,297 | $— |
|
The accompanying notes are an integral part of these financial statements.
|
| 6 Putnam VT Equity Income Fund |
Statement of assets and liabilities
6/30/13 (Unaudited)
| |
| Assets | |
|
| Investment in securities, at value, including $44,674,207 of securities on loan (Note 1): | |
|
| Unaffiliated issuers (identified cost $311,801,989) | $419,532,712 |
|
| Affi liated issuers (identified cost $49,921,417) (Notes 1 and 5) | 49,921,417 |
|
| Cash | 356,405 |
|
| Dividends, interest and other receivables | 865,454 |
|
| Receivable for shares of the fund sold | 115,123 |
|
| Total assets | 470,791,111 |
| |
| Liabilities | |
|
| Payable for shares of the fund repurchased | 332,381 |
|
| Payable for compensation of Manager (Note 2) | 168,718 |
|
| Payable for custodian fees (Note 2) | 5,495 |
|
| Payable for investor servicing fees (Note 2) | 35,570 |
|
| Payable for Trustee compensation and expenses (Note 2) | 152,873 |
|
| Payable for administrative services (Note 2) | 754 |
|
| Payable for distribution fees (Note 2) | 47,944 |
|
| Collateral on securities loaned, at value (Note 1) | 45,816,425 |
|
| Other accrued expenses | 49,565 |
|
| Total liabilities | 46,609,725 |
| | |
| Net assets | $424,181,386 |
| |
| Represented by | |
|
| Paid-in capital (Unlimited shares authorized) (Notes 1 and 4) | $420,625,813 |
|
| Undistributed net investment income (Note 1) | 4,012,815 |
|
| Accumulated net realized loss on investments and foreign currency transactions (Note 1) | (108,187,965) |
|
| Net unrealized appreciation of investments | 107,730,723 |
|
| Total — Representing net assets applicable to capital shares outstanding | $424,181,386 |
| |
| Computation of net asset value Class IA | |
|
| Net assets | $192,078,542 |
|
| Number of shares outstanding | 10,726,354 |
|
| Net asset value, offering price and redemption price per share (net assets divided by number of shares outstanding) | $17.91 |
|
| Computation of net asset value Class IB | |
|
| Net assets | $232,102,844 |
|
| Number of shares outstanding | 13,043,646 |
|
| Net asset value, offering price and redemption price per share (net assets divided by number of shares outstanding) | $17.79 |
|
The accompanying notes are an integral part of these financial statements.
|
| Putnam VT Equity Income Fund 7 |
Statement of operations
Six months ended 6/30/13 (Unaudited)
| |
| Investment income | |
|
| Dividends (net of foreign tax of $39,363) | $5,818,598 |
|
| Interest (including interest income of $2,013 from investments in affiliated issuers) (Note 5) | 59,271 |
|
| Securities lending (Note 1) | 42,312 |
|
| Total investment income | 5,920,181 |
| |
| Expenses | |
|
| Compensation of Manager (Note 2) | 994,791 |
|
| Investor servicing fees (Note 2) | 208,338 |
|
| Custodian fees (Note 2) | 6,592 |
|
| Trustee compensation and expenses (Note 2) | 16,880 |
|
| Distribution fees (Note 2) | 279,698 |
|
| Administrative services (Note 2) | 4,753 |
|
| Other | 68,599 |
|
| Total expenses | 1,579,651 |
| | |
| Expense reduction (Note 2) | (17,000) |
|
| Net expenses | 1,562,651 |
| | |
| Net investment income | 4,357,530 |
| | |
| Net realized gain on investments (Notes 1 and 3) | 22,836,497 |
|
| Net realized loss on foreign currency transactions (Note 1) | (207) |
|
| Net unrealized appreciation of investments during the period | 31,910,692 |
|
| Net gain on investments | 54,746,982 |
| | |
| Net increase in net assets resulting from operations | $59,104,512 |
The accompanying notes are an integral part of these financial statements.
|
| 8 Putnam VT Equity Income Fund |
Statement of changes in net assets
| | |
| | Six months ended | Year ended |
| | 6/30/13* | 12/31/12 |
|
| Increase in net assets | | |
|
| Operations: | | |
|
| Net investment income | $4,357,530 | $8,831,673 |
|
| Net realized gain on investments and foreign currency transactions | 22,836,290 | 22,072,547 |
|
| Net unrealized appreciation of investments and assets and liabilities in foreign currencies | 31,910,692 | 34,980,542 |
|
| Net increase in net assets resulting from operations | 59,104,512 | 65,884,762 |
|
| Distributions to shareholders (Note 1): | | |
|
| From ordinary income | | |
|
| Net investment income | | |
|
| Class IA | (4,207,846) | (4,594,208) |
|
| Class IB | (4,515,361) | (4,307,085) |
|
| Decrease from capital share transactions (Note 4) | (13,469,634) | (26,892,894) |
|
| Total increase in net assets | 36,911,671 | 30,090,575 |
|
| Net assets: | | |
|
| Beginning of period | 387,269,715 | 357,179,140 |
|
| End of period (including undistributed net investment income of $4,012,815 and $8,378,492, respectively) | $424,181,386 | $387,269,715 |
|
| * Unaudited. | | |
The accompanying notes are an integral part of these financial statements.
|
| Putnam VT Equity Income Fund 9 |
Financial highlights (For a common share outstanding throughout the period)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| INVESTMENT OPERATIONS: | | | | | | LESS DISTRIBUTIONS: | | | | | | | | RATIOS AND SUPPLEMENTAL DATA: | | |
|
| Period ended | | Net asset value, beginning of period | | Net investment income (loss)a | | Net realized and unrealized gain (loss) on investments | | Total from investment operations | | From net investment income | | From net realized gain on investments | | Total distributions | | Net asset value, end of period | | Total return at net asset value (%)b,c | | Net assets, end of period (in thousands) | | Ratio of expenses to average net assets (%)b,d | | Ratio of net investment income (loss) to average net assets (%) | | Portfolio turnover (%) |
|
| Class IA | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 6/30/13† | | $15.83 | | .19 | | 2.28 | | 2.47 | | (.39) | | — | | (.39) | | $17.91 | | 15.67* | | $192,079 | | .31* | | 1.11* | | 18* |
|
| 12/31/12 | | 13.56 | | .37 | | 2.27 | | 2.64 | | (.37) | | — | | (.37) | | 15.83 | | 19.62 | | 181,642 | | .64 | | 2.50 | | 51 |
|
| 12/31/11 | | 13.54 | | .34 | | (.04) | | .30 | | (.28) | | — | | (.28) | | 13.56 | | 2.07 | | 175,723 | | .64 | | 2.48 | | 66 |
|
| 12/31/10 | | 12.24 | | .25 | | 1.31 | | 1.56 | | (.26) | | — | | (.26) | | 13.54 | | 12.92 | | 196,747 | | .65 | | 2.02 | | 56 |
|
| 12/31/09 | | 9.72 | | .25 | | 2.40 f | | 2.65 | | (.13) | | — | | (.13) | | 12.24 | | 27.82f | | 198,349 | | .76 e | | 2.43 e | | 112 |
|
| 12/31/08 | | 15.06 | | .30 | | (4.76) | | (4.46) | | (.30) | | (.58) | | (.88) | | 9.72 | | (31.02) | | 76,350 | | .78 e | | 2.41 e | | 74 |
|
| Class IB | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 6/30/13† | | $15.72 | | .17 | | 2.25 | | 2.42 | | (.35) | | — | | (.35) | | $17.79 | | 15.47* | | $232,103 | | .44* | | .99 * | | 18* |
|
| 12/31/12 | | 13.47 | | .33 | | 2.25 | | 2.58 | | (.33) | | — | | (.33) | | 15.72 | | 19.30 | | 205,628 | | .89 | | 2.25 | | 51 |
|
| 12/31/11 | | 13.44 | | .30 | | (.03) | | .27 | | (.24) | | — | | (.24) | | 13.47 | | 1.92 | | 181,456 | | .89 | | 2.23 | | 66 |
|
| 12/31/10 | | 12.15 | | .22 | | 1.31 | | 1.53 | | (.24) | | — | | (.24) | | 13.44 | | 12.70 | | 199,056 | | .90 | | 1.77 | | 56 |
|
| 12/31/09 | | 9.66 | | .23 | | 2.37 f | | 2.60 | | (.11) | | — | | (.11) | | 12.15 | | 27.48f | | 206,018 | | 1.01 e | | 2.17 e | | 112 |
|
| 12/31/08 | | 14.97 | | .27 | | (4.74) | | (4.47) | | (.26) | | (.58) | | (.84) | | 9.66 | | (31.21) | | 67,881 | | 1.03 e | | 2.16 e | | 74 |
|
* Not annualized.
† Unaudited.
a Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding during the period.
b The charges and expenses at the insurance company separate account level are not reflected.
c Total return assumes dividend reinvestment.
d Includes amounts paid through expense offset and brokerage/service arrangements (Note 2).
e Reflects an involuntary contractual expense limitation in effect during the period. For periods prior to December 31, 2009, certain fund expenses were waived in connection with the fund’s investment in Putnam Prime Money Market Fund. As a result of such limitation and/or waivers, the expenses of each class reflect a reduction of less than 0.01% of average net assets.
f Reflects a non-recurring litigation payment received by the fund from Tyco International, Ltd. which amounted to $0.06 per share outstanding as of March 13, 2009. This payment resulted in an increase to total returns of 0.63% for the year ended December 31, 2009.
The accompanying notes are an integral part of these financial statements.
|
| 10 Putnam VT Equity Income Fund |
Notes to financial statements 6/30/13 (Unaudited)
Within the following Notes to financial statements, references to “State Street” represent State Street Bank and Trust Company, references to “the SEC” represent the Securities and Exchange Commission, references to “Putnam Management” represent Putnam Investment Management, LLC, the fund’s manager, an indirect wholly-owned subsidiary of Putnam Investments, LLC and references to “OTC”, if any, represent over-the-counter. Unless otherwise noted, the “reporting period” represents the period from January 1, 2013 through June 30, 2013.
Putnam VT Equity Income Fund (the fund) is a diversified series of Putnam Variable Trust (the Trust), a Massachusetts business trust registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The investment objective of the fund is to seek capital growth and current income by investing mainly in common stocks of midsize and large U.S. companies, with a focus on value stocks that offer the potential for capital growth, current income, or both. Value stocks are issued by companies that Putnam Management believes are currently undervalued by the market. If Putnam Management is correct and other investors recognize the value of the company, the price of its stock may rise. Putnam Management may consider, among other factors, a company’s valuation, financial strength, growth potential, competitive position in its industry, projected future earnings, cash flows and dividends when deciding whether to buy or sell investments.
The fund offers class IA and class IB shares of beneficial interest. Class IA shares are offered at net asset value and are not subject to a distribution fee. Class IB shares are offered at net asset value and pay an ongoing distribution fee, which is identified in Note 2.
In the normal course of business, the fund enters into contracts that may include agreements to indemnify another party under given circumstances. The fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be, but have not yet been, made against the fund. However, the fund’s management team expects the risk of material loss to be remote.
Note 1 — Significant accounting policies
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 accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations. Actual results could differ from those estimates. Subsequent events after the Statement of assets and liabilities date through the date that the financial statements were issued have been evaluated in the preparation of the financial statements.
Investment income, realized and unrealized gains and losses and expenses of the fund are borne pro-rata based on the relative net assets of each class to the total net assets of the fund, except that each class bears expenses unique to that class (including the distribution fees applicable to such classes). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. If the fund were liquidated, shares of each class would receive their pro-rata share of the net assets of the fund. In addition, the Trustees declare separate dividends on each class of shares.
Security valuation Investments for which market quotations are readily available are valued at the last reported sales price on their principal exchange, or official closing price for certain markets, and are classified as Level 1 securities under Accounting Standards Codification 820 Fair Value Measurements and Disclosures (ASC 820). If no sales are reported, as in the case of some securities that are traded OTC, a security is valued at its last reported bid price and is generally categorized as a Level 2 security.
Investments in open-end investment companies (excluding exchange traded funds), if any, which can be classified as Level 1 or Level 2 securities, are valued based on their net asset value. The net asset value of such investment companies equals the total value of their assets less their liabilities and divided by the number of their outstanding shares.
Many securities markets and exchanges outside the U.S. close prior to the close of the New York Stock Exchange and therefore the closing prices for securities in such markets or on such exchanges may not fully reflect events that occur after such close but before the close of the New York Stock Exchange. Accordingly, on certain days, the fund will fair value foreign equity securities taking into account multiple factors including movements in the U.S. securities markets, currency valuations and comparisons to the valuation of American Depository Receipts, exchange-traded funds and futures contracts. These securities, which would generally be classified as Level 1 securities, will be transferred to Level 2 of the fair value hierarchy when they are valued at fair value. The number of days on which fair value prices will be used will depend on market activity and it is possible that fair value prices will be used by the fund to a significant extent. At the close of the reporting period, fair value pricing was used for certain foreign securities in the portfolio. Securities quoted in foreign currencies, if any, are translated into U.S. dollars at the current exchange rate.
To the extent a pricing service or dealer is unable to value a security or provides a valuation that Putnam Management does not believe accurately reflects the security’s fair value, the security will be valued at fair value by Putnam Management. Certain investments, including certain restricted and illiquid securities and derivatives, are also valued at fair value following procedures approved by the Trustees. These valuations consider such factors as significant market or specific security events such as interest rate or credit quality changes, various relationships with other securities, discount rates, U.S. Treasury, U.S. swap and credit yields, index levels, convexity exposures and recovery rates. These securities are classified as Level 2 or as Level 3 depending on the priority of the significant inputs.
Such valuations and procedures are reviewed periodically by the Trustees. The fair value of securities is generally determined as the amount that the fund could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. By its nature, a fair value price is a good faith estimate of the value of a security in a current sale and does not reflect an actual market price, which may be different by a material amount.
Security transactions and related investment income Security transactions are recorded on the trade date (the date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis.
Interest income, net of any applicable withholding taxes, is recorded on the accrual basis. Dividend income, net of any applicable withholding taxes, is recognized on the ex-dividend date except that certain dividends from foreign securities, if any, are recognized as soon as the fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital or capital gains, if any, are reflected as a reduction of cost and/or as a realized gain.
All premiums/discounts are amortized/accreted on a yield-to-maturity basis.
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 is 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 earned 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, currency gains and losses realized between the trade and settlement dates on securities transactions 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.
Securities lending The fund may lend securities, through its agent, to qualified borrowers in order to earn additional income. The loans are collateralized by cash in an amount at least equal to the market value of the securities loaned. The market value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk
|
| Putnam VT Equity Income Fund 11 |
of borrower default will be borne by the fund’s agent; the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the Statement of operations. Cash collateral is invested in Putnam Cash Collateral Pool, LLC, a limited liability company managed by an affiliate of Putnam Management. Investments in Putnam Cash Collateral Pool, LLC are valued at its closing net asset value each business day. There are no management fees charged to Putnam Cash Collateral Pool, LLC. At the close of the reporting period, the value of securities loaned amounted to $44,674,207 and the fund received cash collateral of $45,816,425.
Interfund lending The fund, along with other Putnam funds, may participate in an interfund lending program pursuant to an exemptive order issued by the SEC. This program allows the fund to borrow from or lend to other Putnam funds that permit such transactions. Interfund lending transactions are subject to each fund’s investment policies and borrowing and lending limits. Interest earned or paid on the interfund lending transaction will be based on the average of certain current market rates. During the reporting period, the fund did not utilize the program.
Line of credit The fund participates, along with other Putnam funds, in a $315 million unsecured committed line of credit and a $185 million unsecured uncommitted line of credit, both provided by State Street. Borrowings may be made for temporary or emergency purposes, including the funding of shareholder redemption requests and trade settlements. Interest is charged to the fund based on the fund’s borrowing at a rate equal to the Federal Funds rate plus 1.25% for the committed line of credit and the Federal Funds rate plus 1.30% for the uncommitted line of credit. A closing fee equal to 0.02% of the committed line of credit and $50,000 for the uncommitted line of credit has been paid by the participating funds. In addition, a commitment fee of 0.11% per annum on any unutilized portion of the committed line of credit is allocated to the participating funds based on their relative net assets and paid quarterly. During the reporting period, the fund had no borrowings against these arrangements.
Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time period and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended (the Code), applicable to regulated investment companies.
The fund is subject to the provisions of Accounting Standards Codification 740 Income Taxes (ASC 740). ASC 740 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The fund did not have a liability to record for any unrecognized tax benefits in the accompanying financial statements. 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. Each of the fund’s federal tax returns for the prior three fiscal years remains subject to examination by the Internal Revenue Service.
The fund may also be subject to taxes imposed by governments of countries in which it invests. Such taxes are generally based on either income or gains earned or repatriated. The fund accrues and applies such taxes to net investment income, net realized gains and net unrealized gains as income and/or capital gains are earned. In some cases, the fund may be entitled to reclaim all or a portion of such taxes, and such reclaim amounts, if any, are reflected as an asset on the fund’s books. In many cases, however, the fund may not receive such amounts for an extended period of time, depending on the country of investment.
At December 31, 2012, the fund had a capital loss carryover of $128,268,630 available to the extent allowed by the Code to offset future net capital gain, if any. The amounts of the carryovers and the expiration dates are:
| | | |
| Loss carryover |
|
| Short-term | Long-term | Total | Expiration |
|
| $66,142,465 | N/A | $66,142,465 | 12/31/15 |
|
| 42,508,670 | N/A | 42,508,670 | 12/31/16 |
|
| 19,617,495 | N/A | 19,617,495 | 12/31/17 |
|
Under the Regulated Investment Company Modernization Act of 2010, the fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred will be required to be utilized prior to the losses incurred in pre-enactment tax years. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law.
The aggregate identified cost on a tax basis is $364,479,030, resulting in gross unrealized appreciation and depreciation of $108,038,537 and $3,063,438, respectively, or net unrealized appreciation of $104,975,099.
Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, 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. Dividend sources are estimated at the time of declaration. Actual results may vary. Any non-taxable return of capital cannot be determined until final tax calculations are completed after the end of the fund’s fiscal year. 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.
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.
Beneficial interest At the close of the reporting period, insurance companies or their separate accounts were record owners of all but a de minimis number of the shares of the fund. Approximately 36.2% of the fund is owned by accounts of one insurance company.
Note 2 — Management fee, administrative services and other transactions
The fund pays Putnam Management a management fee (based on the fund’s average net assets and computed and paid monthly) at annual rates that may vary based on the average of the aggregate net assets of most open-end funds, as defined in the fund’s management contract, sponsored by Putnam Management. Such annual rates may vary as follows:
| |
| 0.630% | of the first $5 billion, |
| 0.580% | of the next $5 billion, |
| 0.530% | of the next $10 billion, |
| 0.480% | of the next $10 billion, |
| 0.430% | of the next $50 billion, |
| 0.410% | of the next $50 billion, |
| 0.400% | of the next $100 billion and |
| 0.395% | of any excess thereafter. |
Putnam Management has contractually agreed, through June 30, 2014, to waive fees or reimburse the fund’s expenses to the extent necessary to limit the cumulative expenses of the fund, exclusive of brokerage, interest, taxes, investment-related expenses, extraordinary expenses, acquired fund fees and expenses and payments under the fund’s investor servicing contract, investment management contract and distribution plans, on a fiscal year-to-date basis to an annual rate of 0.20% of the fund’s average net assets over such fiscal year-to-date period. During the reporting period, the fund’s expenses were not reduced as a result of this limit.
Putnam Investments Limited (PIL), an affiliate of Putnam Management, is authorized by the Trustees to manage a separate portion of the assets of the fund as determined by Putnam Management from time to time. Putnam Management pays a quarterly sub-management fee to PIL for its services at an annual rate of 0.35% of the average net assets of the portion of the fund managed by PIL.
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 State Street. Custody fees are based on the fund’s asset level, the number of its security holdings and transaction volumes.
Putnam Investor Services, Inc., an affiliate of Putnam Management, provides investor servicing agent functions to the fund. Putnam Investor Services, Inc.
|
| 12 Putnam VT Equity Income Fund |
was paid a monthly fee for investor servicing at an annual rate of 0.10% of the fund’s average net assets. During the reporting period, the expenses for each class of shares related to investor servicing fees were as follows:
| |
| Class IA | $95,563 |
| Class IB | 112,775 |
|
| Total | $208,338 |
The fund has entered into expense offset arrangements with Putnam Investor Services, Inc. and State Street whereby Putnam Investor Services, Inc.’s and State Street’s fees are reduced by credits allowed on cash balances. The fund also reduced expenses through brokerage/service arrangements. For the reporting period, the fund’s expenses were reduced by $49 under the expense offset arrangements and by $16,951 under the brokerage/service arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of which $306, as a quarterly retainer, has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees also are reimbursed for expenses they incur relating to their services as Trustees.
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 and were first elected prior to 2004. Benefits under the Pension Plan are equal to 50% of the Trustee’s average annual attendance and retainer fees for the three years ended December 31, 2005. The retirement benefit is payable during a Trustee’s lifetime, beginning the year following retirement, for the number of years of service through December 31, 2006. Pension expense for the fund is included in Trustee compensation and expenses in the Statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the Statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003.
The fund has adopted a distribution plan (the Plan) with respect to its class IB shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plan is to compensate Putnam Retail Management Limited Partnership, an indirect wholly-owned subsidiary of Putnam Investments, LLC, for services provided and expenses incurred in distributing shares of the fund. The Plan provides for payment by the fund to Putnam Retail Management Limited Partnership at an annual rate of up to 0.35% of the average net assets attributable to the fund’s class IB shares. The Trustees have approved payment by the fund at an annual rate of 0.25% of the average net assets attributable to the fund’s class IB shares. During the reporting period, the class specific expenses related to distribution fees were as follows:
Note 3 — Purchases and sales of securities
During the reporting period, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $74,090,231 and $91,829,007, respectively. There were no purchases or proceeds from sales of long-term U.S. government securities.
Note 4 — Capital shares
At the close of the reporting period, there was an unlimited number of shares of beneficial interest authorized. Subscriptions and redemptions are presented at the omnibus level. Transactions in capital shares were as follows:
| | | | | | | | |
| | | Class IA shares | | | Class IB shares | |
| | Six months ended 6/30/13 | Year ended 12/31/12 | Six months ended 6/30/13 | Year ended 12/31/12 |
| |
|
| | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount |
|
| Shares sold | 127,104 | $2,223,727 | 308,581 | $4,587,937 | 1,333,013 | $23,090,474 | 2,547,198 | $37,656,434 |
|
| Shares issued in connection with | | | | | | | | |
| reinvestment of distributions | 243,510 | 4,207,846 | 310,419 | 4,594,208 | 262,827 | 4,515,361 | 292,601 | 4,307,085 |
|
| | 370,614 | 6,431,573 | 619,000 | 9,182,145 | 1,595,840 | 27,605,835 | 2,839,799 | 41,963,519 |
|
| Shares repurchased | (1,120,762) | (19,204,954) | (2,098,865) | (30,852,489) | (1,636,262) | (28,302,088) | (3,227,235) | (47,186,069) |
|
| Net decrease | (750,148) | $(12,773,381) | (1,479,865) | $(21,670,344) | (40,422) | $(696,253) | (387,436) | $(5,222,550) |
|
Note 5 — Transactions with affiliated issuers
Transactions during the reporting period with Putnam Money Market Liquidity Fund and Putnam Short Term Investment Fund, which are under common ownership and control, were as follows:
| | | | | |
| | Market value at the beginning | | | | Market value at the end of |
| Name of affiliate | of the reporting period | Purchase cost | Sale proceeds | Investment income | the reporting period |
|
| Putnam Money Market Liquidity Fund* | $4,415,394 | $25,642,994 | $30,058,388 | $1,000 | $— |
|
| Putnam Short Term Investment Fund* | — | 32,535,459 | 28,430,467 | 1,013 | 4,104,992 |
|
| Totals | $4,415,394 | $58,178,453 | $58,488,855 | $2,013 | $4,104,992 |
|
* Management fees charged to Putnam Money Market Liquidity Fund and Putnam Short Term Investment Fund have been waived by Putnam Management.
Note 6 — Market, credit and other risks
In the normal course of business, the fund trades financial instruments and enters into financial transactions where risk of potential loss exists due to changes in the market (market risk) or failure of the contracting party to the transaction to perform (credit risk). The fund may be exposed to additional credit risk that an institution or other entity with which the fund has unsettled or open transactions will default. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations.
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| Putnam VT Equity Income Fund 13 |
Note 7 — Offsetting of financial and derivative assets and liabilities
| | |
| | Goldman Sachs Bank USA | Total |
|
| Assets: | | |
|
| Securities on loan** | $44,674,207 | $44,674,207 |
|
| Total Assets | $44,674,207 | $44,674,207 |
|
| Total Financial and Derivative Net Assets | $44,674,207 | $44,674,207 |
|
| Total collateral received (pledged)##† | $44,674,207 | $44,674,207 |
|
| Net amount | $— | $— |
|
** Included with Investments in securities on the Statement of assets and liabilities.
## Any over-collateralization of total financial and derivative net assets is not shown.
† Additional collateral may be required from certain brokers based on individual agreements.
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| 14 Putnam VT Equity Income Fund |
Trustee approval of management contract
General conclusions
The Board of Trustees of the Putnam funds oversees the management of each fund and, as required by law, determines annually whether to approve the continuance of your fund’s management contract with Putnam Investment Management (“Putnam Management”) and the sub-management contract with respect to your fund between Putnam Management and its affiliate, Putnam Investments Limited (“PIL”). The Board of Trustees, with the assistance of its Contract Committee, requests and evaluates all information it deems reasonably necessary under the circumstances in connection with its annual contract review. The Contract Committee consists solely of Trustees who are not “interested persons” (as this term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”)) of the Putnam funds (“Independent Trustees”).
At the outset of the review process, members of the Board’s independent staff and independent legal counsel met with representatives of Putnam Management to review the annual contract review materials furnished to the Contract Committee during the course of the previous year’s review and to discuss possible changes in these materials that might be necessary or desirable for the coming year. Following these discussions and in consultation with the Contract Committee, the Independent Trustees’ independent legal counsel requested that Putnam Management furnish specified information, together with any additional information that Putnam Management considered relevant, to the Contract Committee. Over the course of several months ending in June 2013, the Contract Committee met on a number of occasions with representatives of Putnam Management, and separately in executive session, to consider the information that Putnam Management provided. Throughout this process, the Contract Committee was assisted by the members of the Board’s independent staff and by independent legal counsel for the Putnam funds and the Independent Trustees.
In May 2013, the Contract Committee met in executive session to discuss and consider its preliminary recommendations with respect to the continuance of the contracts. At the Trustees’ June 20, 2013 meeting, the Contract Committee met in executive session with the other Independent Trustees to review a summary of the key financial data that the Contract Committee considered in the course of its review. The Contract Committee then presented its written report, which summarized the key factors that the Committee had considered and set forth its final recommendations. The Contract Committee then recommended, and the Independent Trustees approved, the continuance of your fund’s management and sub-management contracts, effective July 1, 2013, subject to certain changes in the sub-management contract noted below. (Because PIL is an affiliate of Putnam Management and Putnam Management remains fully responsible for all services provided by PIL, the Trustees have not evaluated PIL as a separate entity, and all subsequent references to Putnam Management below should be deemed to include reference to PIL as necessary or appropriate in the context.) The Independent Trustees’ approval was based on the following conclusions:
• That the fee schedule in effect for your fund represented reasonable compensation in light of the nature and quality of the services being provided to the fund, the fees paid by competitive funds, and the costs incurred by Putnam Management in providing services to the fund, and
• That the fee schedule represented an appropriate sharing between fund shareholders and Putnam Management of such economies of scale as may exist in the management of the fund at current asset levels.
These conclusions were based on a comprehensive consideration of all information provided to the Trustees and were not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations and how the Trustees considered these factors are described below, although individual Trustees may have evaluated the information presented differently, giving different weights to various factors. It is also important to recognize that the management arrangements for your fund and the other Putnam funds are the result of many years of review and discussion between the Independent Trustees and Putnam Management, that some aspects of the arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of fee arrangements in previous years. For example, with some minor exceptions, the current fee arrangements in the management contracts for the Putnam funds were implemented at the beginning of 2010 following extensive review and discussion by the Trustees, as well as approval by shareholders.
As noted above, the Trustees considered certain administrative revisions to your fund’s sub-management contract. Putnam Management recommended that the sub-management contract be revised to reduce the sub-management fee that Putnam Management pays to PIL with respect to the portion of the portfolios of certain funds, but not your fund, that may be allocated to PIL from time to time. The Independent Trustees’ approval of this recommendation was based on their conclusion that these changes would have no practical effect on Putnam Management’s continued responsibility for the management of these funds or the costs borne by fund shareholders and would not result in any reduction in the nature and quality of services provided to the funds.
Management fee schedules and total expenses
The Trustees reviewed the management fee schedules in effect for all Putnam funds, including fee levels and breakpoints. The Trustees also reviewed the total expenses of each Putnam fund, recognizing that in most cases management fees represented the major, but not the sole, determinant of total costs to shareholders.
In reviewing fees and expenses, the Trustees generally focus their attention on material changes in circumstances — for example, changes in assets under management, changes in a fund’s investment style, changes in Putnam Management’s operating costs or profitability, or changes in competitive practices in the mutual fund industry — that suggest that consideration of fee changes might be warranted. The Trustees concluded that the circumstances did not warrant changes to the management fee structure of your fund.
Under its management contract, your fund has the benefit of breakpoints in its management fee schedule that provide shareholders with economies of scale in the form of reduced fee levels as assets under management in the Putnam family of funds increase. The Trustees concluded that the fee schedule in effect for your fund represented an
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| Putnam VT Equity Income Fund 15 |
appropriate sharing of economies of scale between fund shareholders and Putnam Management.
As in the past, the Trustees also focused on the competitiveness of each fund’s total expense ratio. In order to ensure that expenses of the Putnam funds continue to meet competitive standards, the Trustees and Putnam Management have implemented certain expense limitations. These expense limitations were: (i) a contractual expense limitation applicable to all retail open-end funds of 32 basis points on investor servicing fees and expenses and (ii) a contractual expense limitation applicable to all open-end funds of 20 basis points on so-called “other expenses” (i.e., all expenses exclusive of management fees, investor servicing fees, distribution fees, investment-related expenses, interest, taxes, brokerage commissions, extraordinary expenses and acquired fund fees and expenses). These expense limitations serve in particular to maintain competitive expense levels for funds with large numbers of small shareholder accounts and funds with relatively small net assets. Most funds, including your fund, had sufficiently low expenses that these expense limitations did not apply. Putnam Management’s support for these expense limitations, including its agreement to reduce the expense limitation applicable to the open-end funds’ investor servicing fees and expenses as noted above, was an important factor in the Trustees’ decision to approve the continuance of your fund’s management and sub-management contracts.
The Trustees reviewed comparative fee and expense information for a custom group of competitive funds selected by Lipper Inc. This comparative information included your fund’s percentile ranking for effective management fees and total expenses (excluding any applicable 12b-1 fee), which provides a general indication of your fund’s relative standing. In the custom peer group, your fund ranked in the 1st quintile in effective management fees (determined for your fund and the other funds in the custom peer group based on fund asset size and the applicable contractual management fee schedule) and in the 1st quintile in total expenses (excluding any applicable 12b-1 fees) as of December 31, 2012 (the first quintile representing the least expensive funds and the fifth quintile the most expensive funds). The fee and expense data reported by Lipper as of December 31, 2012 reflected the most recent fiscal year-end data available in Lipper’s database at that time.
In connection with their review of the management fees and total expenses of the Putnam funds, the Trustees also reviewed the costs of the services provided and the profits realized by Putnam Management and its affiliates from their contractual relationships with the funds. This information included trends in revenues, expenses and profitability of Putnam Management and its affiliates relating to the investment management, investor servicing and distribution services provided to the funds. In this regard, the Trustees also reviewed an analysis of Putnam Management’s revenues, expenses and profitability, allocated on a fund-by-fund basis, with respect to the funds’ management, distribution, and investor servicing contracts. For each fund, the analysis presented information about revenues, expenses and profitability for each of the agreements separately and for the agreements taken together on a combined basis. The Trustees concluded that, at current asset levels, the fee schedules in place represented reasonable compensation for the services being provided and represented an appropriate sharing of such economies of scale as may exist in the management of the Putnam funds at that time.
The information examined by the Trustees as part of their annual contract review for the Putnam funds has included for many years information regarding fees charged by Putnam Management and its affiliates to institutional clients such as defined benefit pension plans, college endowments, and the like. This information included comparisons of those fees with fees charged to the funds, as well as an assessment of the differences in the services provided to these different types of clients. The Trustees observed that the differences in fee rates between institutional clients and mutual funds are by no means uniform when examined by individual asset sectors, suggesting that differences in the pricing of investment management services to these types of clients may reflect historical competitive forces operating in separate markets. The Trustees considered the fact that in many cases fee rates across different asset classes are higher on average for mutual funds than for institutional clients, as well as the differences between the services that Putnam Management provides to the Putnam funds and those that it provides to its institutional clients. The Trustees did not rely on these comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.
Investment performance
The quality of the investment process provided by Putnam Management represented a major factor in the Trustees’ evaluation of the quality of services provided by Putnam Management under your fund’s management contract. The Trustees were assisted in their review of the Putnam funds’ investment process and performance by the work of the investment oversight committees of the Trustees, which meet on a regular basis with the funds’ portfolio teams and with the Chief Investment Officer and other senior members of Putnam Management’s Investment Division throughout the year. The Trustees concluded that Putnam Management generally provides a high-quality investment process — based on the experience and skills of the individuals assigned to the management of fund portfolios, the resources made available to them, and in general Putnam Management’s ability to attract and retain high-quality personnel — but also recognized that this does not guarantee favorable investment results for every fund in every time period.
The Trustees considered that 2012 was a year of strong competitive performance for many of the Putnam funds, with only a relatively small number of exceptions. They noted that this strong performance was exemplified by the fact that the Putnam funds were recognized by Barron’s as the best performing mutual fund complex for 2012 — the second time in four years that Putnam Management has achieved this distinction for the Putnam funds. They also noted, however, the disappointing investment performance of some funds for periods ended December 31, 2012 and considered information provided by Putnam Management regarding the factors contributing to the underperformance and actions being taken to improve the performance of these particular funds. The Trustees indicated their intention to continue to monitor performance trends to assess the effectiveness of these efforts and to evaluate whether additional actions to address areas of underperformance are warranted.
For purposes of evaluating investment performance, the Trustees generally focus on competitive industry rankings for the one-year, three-year, and five-year periods. For a number of Putnam funds with relatively unique investment mandates, the Trustees evaluated performance based on comparisons of their absolute gross returns with the returns of selected investment benchmarks or targeted annualized returns. In the case of your fund, the Trustees considered that its class IA share cumulative total return performance at net
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| 16 Putnam VT Equity Income Fund |
asset value was in the following quartiles of its Lipper Inc. peer group (Lipper VP (Underlying Funds) — Equity Income Funds) for the one-year, three-year and five-year periods ended December 31, 2012 (the first quartile representing the best-performing funds and the fourth quartile the worst-performing funds):
| | |
| One-year period | Three-year period | Five-year period |
|
| 1st | 1st | 1st |
|
For the one-year and five-year periods ended December 31, 2012, your fund’s performance was in the top decile of its Lipper peer group. Over the one-year, three-year and five-year periods ended December 31, 2012, there were 63, 56 and 53 funds, respectively, in your fund’s Lipper peer group. (When considering performance information, shareholders should be mindful that past performance is not a guarantee of future results.)
Brokerage and soft-dollar allocations; investor servicing
The Trustees considered various potential benefits that Putnam Management may receive in connection with the services it provides under the management contract with your fund. These include benefits related to brokerage allocation and the use of soft dollars, whereby a portion of the commissions paid by a fund for brokerage may be used to acquire research services that are expected to be useful to Putnam Management in managing the assets of the fund and of other clients. Subject to policies established by the Trustees, soft dollars generated by these means are used primarily to acquire brokerage and research services that enhance Putnam Management’s investment capabilities and supplement Putnam Management’s internal research efforts. However, the Trustees noted that a portion of available soft dollars continues to be used to pay fund expenses. The Trustees indicated their continued intent to monitor regulatory and industry developments in this area with the assistance of their Brokerage Committee and also indicated their continued intent to monitor the allocation of the Putnam funds’ brokerage in order to ensure that the principle of seeking best price and execution remains paramount in the portfolio trading process.
Putnam Management may also receive benefits from payments that the funds make to Putnam Management’s affiliates for investor or distribution services. In conjunction with the annual review of your fund’s management and sub-management contracts, the Trustees reviewed your fund’s investor servicing agreement with Putnam Investor Services, Inc. (“PSERV”) and its distributor’s contracts and distribution plans with Putnam Retail Management Limited Partnership (“PRM”), both of which are affiliates of Putnam Management. The Trustees concluded that the fees payable by the funds to PSERV and PRM, as applicable, for such services are reasonable in relation to the nature and quality of such services, the fees paid by competitive funds, and the costs incurred by PSERV and PRM, as applicable, in providing such services.
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Other important information
Proxy voting
Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds’ proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2013, are available in the Individual Investors section of putnam.com and on the SEC’s website, www.sec.gov. If you have questions about finding forms on the SEC’s website, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds’ proxy voting guidelines and procedures at no charge by calling Putnam’s Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
Each Putnam VT fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund’s Forms N-Q on the SEC’s website at www.sec.gov. In addition, the fund’s Forms N-Q may be reviewed and copied at the SEC’s public reference room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC’s website or the operation of the public reference room.
| | |
| Fund information | | |
| |
| Investment Manager | Investor Servicing Agent | Trustees |
| Putnam Investment Management, LLC | Putnam Investor Services, Inc. | Jameson A. Baxter, Chair |
| One Post Office Square | Mailing address: | Liaquat Ahamed |
| Boston, MA 02109 | P.O. Box 8383 | Ravi Akhoury |
| | Boston, MA 02266-8383 | Barbara M. Baumann |
| Investment Sub-Manager | 1-800-225-1581 | Charles B. Curtis |
| Putnam Investments Limited | | Robert J. Darretta |
| 57–59 St James’s Street | Custodian | Katinka Domotorffy |
| London, England SW1A 1LD | State Street Bank and Trust Company | John A. Hill |
| | | Paul L. Joskow |
| Marketing Services | Legal Counsel | Kenneth R. Leibler |
| Putnam Retail Management | Ropes & Gray LLP | Robert E. Patterson |
| One Post Office Square | | George Putnam, III |
| Boston, MA 02109 | | Robert L. Reynolds |
| | | W. Thomas Stephens |
| | | |
The fund’s Statement of Additional Information contains additional information about the fund’s Trustees and is available without charge upon request by calling 1-800-225-1581.
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| Putnam VT Equity Income Fund 21 |
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| | | |
| This report has been prepared for the shareholders | | H503 |
| of Putnam VT Equity Income Fund. | 282483 8/13 |
| |
| Item 3. Audit Committee Financial Expert: |
| |
| Item 4. Principal Accountant Fees and Services: |
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| Item 5. Audit Committee of Listed Registrants |
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| Item 6. Schedule of Investments: |
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| The registrant’s schedule of investments in unaffiliated issuers is included in the report to shareholders in Item 1 above. |
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| Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End Management Investment Companies: |
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| Item 8. Portfolio Managers of Closed-End Investment Companies |
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| Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers: |
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| Item 10. Submission of Matters to a Vote of Security Holders: |
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| Item 11. Controls and Procedures: |
| |
| (a) The registrant’s principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the design and operation of such procedures are generally effective to provide reasonable assurance that information required to be disclosed by the registrant in this report is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. |
| |
| (b) Changes in internal control over financial reporting: Not applicable |
| |
| (a)(2) Separate certifications for the principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are filed herewith. |
| |
| (b) The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940, as amended, are filed herewith. |
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| By (Signature and Title): |
| |
| /s/Janet C. Smith
Janet C. Smith
Principal Accounting Officer
|
| |
| Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
| |
| By (Signature and Title): |
| |
| /s/Jonathan S. Horwitz
Jonathan S. Horwitz
Principal Executive Officer
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| |
| By (Signature and Title): |
| |
| /s/Steven D. Krichmar
Steven D. Krichmar
Principal Financial Officer
|
