| UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||
| Washington, D.C. 20549 | ||
FORM N-CSR | ||
| CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES | ||
| Investment Company Act file number: | (811-06190) |
| Exact name of registrant as specified in charter: | Putnam International Equity Fund |
| Address of principal executive offices: | One Post Office Square, Boston, Massachusetts 02109 |
| Name and address of agent for service: | Robert T. Burns, Vice President One Post Office Square Boston, Massachusetts 02109 |
| Copy to: | Bryan Chegwidden, Esq. Ropes & Gray LLP 1211 Avenue of the Americas New York, New York 10036 |
| Registrant's telephone number, including area code: | (617) 292-1000 |
| Date of fiscal year end: | June 30, 2016 |
| Date of reporting period : | July 1, 2015 — June 30, 2016 |
Item 1. Report to Stockholders: |
| The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940: | |||
Putnam
International Equity
Fund
Annual report
6 | 30 | 16
| Message from the Trustees | 1 | |
| About the fund | 2 | |
| Interview with your fund’s portfolio manager | 4 | |
| Performance snapshot | 4 | |
| Your fund’s performance | 11 | |
| Your fund’s expenses | 13 | |
| Terms and definitions | 15 | |
| Other information for shareholders | 16 | |
| Important notice regarding Putnam’s privacy policy | 17 | |
| Trustee approval of management contract | 18 | |
| Financial statements | 23 | |
| Federal tax information | 54 | |
| About the Trustees | 55 | |
| Officers | 57 | |
Consider these risks before investing: International investing involves currency, economic, and political risks. Emerging-market securities carry illiquidity and volatility risks. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. Stock prices may fall or fail to rise over time for a variety of reasons, including general financial market conditions and factors related to a specific issuer or industry. Risks associated with derivatives include increased investment exposure (which may be considered leverage) and, in the case of over-the-counter instruments, the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. You can lose money by investing in the fund.
Message from the Trustees
Dear Fellow Shareholder:
As summer comes to a close, we note that despite multiple headwinds and uncertainties both at home and overseas, the overall trajectory of the equity markets has been somewhat positive so far in 2016.
It is heartening that markets have recovered from various international and domestic challenges. We know volatile markets can be unsettling, but if recent events are any indication, we believe it is important not to overreact to short-term developments and to focus instead on the long term.
We believe the global environment continues to be supportive of stocks. Central banks around the world stand ready to add more stimulus and liquidity, if necessary, while the underpinnings of the U.S. economy remain solid, in our view. Overseas, higher hurdles to growth exist, but we believe that market gyrations may present investment opportunities. Within fixed income, yields have fallen — and in some cases have gone further into negative territory — as investors seek safety from turbulent markets, notably after the United Kingdom’s vote to depart the European Union.
At Putnam, our portfolio managers seek positive returns in every kind of market environment, backed by our network of global analysts and their own experience navigating changing conditions. They, and we, share a deep conviction that an active approach based on fundamental research can play a valuable role in your portfolio. In the following pages, you will find an overview of your fund’s performance for the reporting period ended June 30, 2016, as well as an outlook for the coming months.
As always, it may be helpful for you to consult with your financial advisor, who can assist you in determining if your portfolio remains aligned with your long-term goals, time horizon, and tolerance for risk.
Thank you for investing with Putnam.
Interview with your fund’s portfolio manager
Simon [Sam] Davis
What was the environment like for international equities for the 12-month reporting period ended June 30, 2016?
The first half of the reporting period was a challenging six months for non-U.S. markets. Widespread market weakness was driven by an economic slowdown in China, uncertainty about the strength of the U.S. economic recovery, and weakness in the global commodity complex. Emerging markets felt the drag from China’s weakness most acutely, but developed markets, including Europe, were not immune to the ripple effects of this slowdown.
The second half of the reporting period included a volatile start to 2016 and a fairly strong relief rally that began in mid-February and largely continued until the end of June. In part, this was driven by a steady uptick in commodity prices, which found one important cause in better economic data out of China. This took pressure off a variety of commodity exporters and companies throughout the global energy sector.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will fluctuate, and you may have a gain or a loss when you sell your shares. Performance of class A shares assumes reinvestment of distributions and does not account for taxes. Fund returns in the bar chart do not reflect a sales charge of 5.75%; had they, returns would have been lower. See pages 5 and 11–13 for additional performance information. For a portion of the periods, the fund had expense limitations, without which returns would have been lower. To obtain the most recent month-end performance, visit putnam.com.
| 4 | International Equity Fund |
On June 23, however, volatility returned, as U.K. voters decided in a referendum that the nation will leave the European Union [EU]. This event sent global markets into turmoil and caused a significant decline in the value of the pound. In the wake of this vote for “Brexit,” we expect uncertainty to impact a variety of non-U.S. equity markets, at least in the short term. Quite simply, we believe investors will be struggling to discount what Brexit means for different countries, sectors, and companies, leading to ongoing volatility.
The fund underperformed its benchmark for the period. What led to this result?
Following a sustained period of outperformance, the results for this period were disappointing. Underperformance over the period was mainly driven by weak stock selection in the financials, energy, and industrials sectors.
In addition, while some of our currency-related positioning helped protect performance in the turmoil that followed the vote for “Brexit,” these measures were overshadowed by poor stock-specific performance in a handful of smaller-cap U.K. companies, some of which declined by a third of their value in just two days after the vote.
Which stocks or strategies detracted most from relative performance?
The largest detractor over the period was Genel Energy, an oil exploration and production company with operations in Iraqi Kurdistan. Our thesis on Genel was that it owned and operated substantial oil and gas fields at the very low end of the cost curve and so could generate profits and cash flow even at low oil prices. Notwithstanding this, its shares were not immune to the rapid and substantial drop in the price of crude. Given that the company operates in Iraqi Kurdistan, it also faces various political risks — for example, whether the Iraqi government would permit Kurdish authorities to receive payments for oil shipments, and whether Kurdish authorities would pass these payments on to Genel in a timely manner. In both issues we believed that the outcome would be favorable.
Local political and economic factors resulted in the Kurdish government receiving payment for the oil, as we expected. However, fiscal
This comparison shows your fund’s performance in the context of broad market indexes for the 12 months ended 6/30/16. See pages 4 and 11–13 for additional fund performance information. Index descriptions can be found on page 15.
| International Equity Fund | 5 |
strains on the Kurdish government, not least the need to fund its Peshmerga forces fighting against the Islamic State, led to significant delays in these payments being passed on to Genel. This was another factor that caused the price of the company’s shares to decline. More fundamentally, delay in these payments appears to have undermined the company’s ability to invest in its assets, leading to production declines and the potential for writedowns. After the first six months of the period, we recognized that our original thesis was undermined by these recent developments and we sold the stock.
Yamaha, the Japanese motorcycle and boat-engine manufacturer, was also a large detractor from relative returns. The company endured a difficult period, largely due to the yen’s strengthening versus the dollar. Southeast Asia has been the primary market for Yamaha’s motorcycles, while the United States has been the primary market for the company’s boat engines. Sales in both of these markets tend to be dollar-denominated, which means the strengthening yen usually translates into lower yen-denominated revenue and profits for Yamaha. We continued to hold the stock at period-end.
Natixis and ING Groep, two European financial stocks that we overweighted relative to the benchmark, experienced disappointing share price performance during the period, as did much of the European financial industry. We continue to like these companies, however, as we think they are attractively valued, both in absolute terms and relative to other European banks. Also, with Natixis, one of the main drivers of earnings growth has been the company’s asset management business. We believe that this area will continue to see healthy inflows and decent performance.
Allocations are shown as a percentage of the fund’s net assets as of 6/30/16. Cash 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 information in the portfolio schedule notes included in the financial statements due to the inclusion of derivative securities, any interest accruals, the exclusion of as-of trades, if any, and rounding. Holdings and allocations may vary over time.
| 6 | International Equity Fund |
What were some stocks or strategies that stood out for their contribution to relative performance?
The top contributor to relative performance during the period was the stock of Royal Dutch Shell, one of the world’s largest integrated oil and gas companies. In the fund, we had an underweight position when the share price declined in the first half of 2015 in lock-step with a declining oil price. But we moved overweight early in 2016 and benefited from the subsequent share price rally.
Another large contributor to relative results was the stock of a France-domiciled water and waste company, Veolia. This global company had suffered for a long time under an inefficient management team that wasted capital on a series of poor acquisitions. Veolia underwent an important management change a few years ago, however, that led to improved operational efficiency and much more disciplined corporate investment. During the period, investors responded favorably to the stock, as Veolia’s profit margins improved on the back of cost-cutting and restructuring, and investors also recognized that the company would likely be a beneficiary of a cyclical economic recovery in Europe.
What was the impact of derivatives on the fund’s relative performance?
During the period, one strategy that stood out for its positive impact on performance involved our use of forward currency contracts. These contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date, are
This table shows the fund’s top 10 holdings by percentage of the fund’s net assets as of 6/30/16. Short-term investments and derivatives, if any, are excluded. Holdings will vary over time.
| International Equity Fund | 7 |
primarily used to manage the currency risk versus the benchmark that results from the portfolio’s country and regional positioning. These derivatives modestly enhanced the fund’s performance relative to the benchmark over the period.
What do you see as some of the key economic risks stemming from Brexit?
A major risk for the United Kingdom, the fifth-largest economy in the world, is its elevated current account deficit. At the moment, the U.K. current account deficit is approximately 7% of gross domestic product, which is high relative to other advanced economies. This has historically been funded by foreign direct investment [FDI] and portfolio flows. We think FDI is likely to weaken as firms wait to see how the United Kingdom’s trading relationship with the European Union develops. Portfolio flows have held up well so far, but we believe they may be at risk if central banks and other investors turn more negative on British sovereign debt. As of mid-July, sterling had sold off about 11% against the U.S. dollar; this has been the main mechanism for economic adjustment as it allows British exports to become more competitive and will make imports more expensive, thereby naturally leading to a narrowing of the current account deficit over time.
Another key risk concerns the broader European Union. As has been widely discussed in the media, Brexit may provide a stimulus for other anti-EU parties across Europe to gain strength and agitate for their own referenda. We think this would lead to heightened political uncertainty and, potentially, have a materially negative economic impact. In our view, it would also likely entail a return of investor concern over eurozone fragmentation and the future of the euro itself, which in turn could lead to peripheral bond yields rising and equity markets selling off.
This chart shows the fund’s largest allocation shifts, by percentage, over the past six months. Allocations are shown as a percentage of the fund’s net assets. Current period 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, the use of different classifications of securities for presentation purposes, and rounding. Holdings and allocations may vary over time.
| 8 | International Equity Fund |
In your outlook for international stocks, is there a silver lining of opportunity?
One potential positive result that we anticipate would be a major policy response, either monetary or fiscal. In Japan, the use of “helicopter money” — literally distributing large sums of money to consumers to encourage spending — is becoming a real possibility in our view as the authorities there are reaching the limit of what more orthodox policies can achieve. It is worth noting though that, with the marked decline in global government bond yields post-Brexit, equity markets have appeared to take heart from the expectation of continued benign financing conditions, and in aggregate have behaved better than might have been expected through this period.
For Europe-based companies, we believe there are already some potential tailwinds worth mentioning. First, because non-U.S markets sold off broadly, opportunities to buy into undervalued companies have emerged, in our view. Second, we believe that strengthening emerging-market currencies, from the Brazilian real to the Russian ruble, implies an earnings tailwind for multinationals with revenue exposures to these markets.
The opportunities we see are not isolated to the Brexit epicenter. We also see potential among Japanese stocks, including exporting companies — notwithstanding the strengthening of the yen in the wake of Brexit. In addition, we see opportunities in select emerging markets such as India, Mexico, and Indonesia, where we believe potential tax and other government reforms could provide a boost to the corporate sector.
Thank you, Sam, for this update on the fund.
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. Current and future portfolio holdings are subject to risk.
Portfolio Manager Simon Davis is a Co-Head of International Equities at Putnam. He has a B.A. from Oxford University. Simon joined Putnam in 2000 and has been in the investment industry since 1988.
| International Equity Fund | 9 |
IN THE NEWS
Prompted by ongoing slow growth in advanced economies and persistently low commodity prices, the World Bank has trimmed its world economic growth forecast for 2016. In its semiannual Global Economic Prospects report, the Washington-based development bank reduced its 2016 global growth prediction to 2.4% — half a percentage point below its January forecast. In addition to sluggish growth in advanced economies and low commodity prices, the World Bank cited anemic global trade and weak global capital flows as reasons for the downgrade. For the eurozone, the World Bank expects growth to hold steady in 2016 at 1.6%, unchanged from the 2015 growth rate. For Japan, the World Bank pared growth to 0.5% from 0.6%. Commodity-exporting emerging-market and developing-market countries account for half of the World Bank’s downward revision. These countries, including Brazil and Venezuela, have struggled to adapt to lower prices for oil and other key commodities. Growth in these economies is projected to advance at just 0.4% this year, down from the 1.2% projected in January. Going forward, global growth is expected to pick up modestly, reaching 2.9% in 2017 and 3.1% in 2018, according to the World Bank.
| 10 International Equity Fund |
Your fund’s performance
This section shows your fund’s performance, price, and distribution information for periods ended June 30, 2016, the end of its most recent fiscal year. In accordance with regulatory requirements for mutual funds, we also include expense information taken from the fund’s current prospectus. Performance should always be considered in light of a fund’s investment strategy. 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. For the most recent month-end performance, please visit the Individual Investors section at putnam.com or call Putnam at 1-800-225-1581. Class R, R5, R6, and Y shares are not available to all investors. See the Terms and Definitions section in this report for definitions of the share classes offered by your fund.
Fund performance Total return for periods ended 6/30/16
| Class A | Class B | Class C | Class M | Class R | Class R5 | Class R6 | Class Y | |||||
| (inception dates) | (2/28/91) | (6/1/94) | (7/26/99) | (12/1/94) | (1/21/03) | (7/2/12) | (7/2/12) | (7/12/96) | ||||
| Before | After | Before | After | Net | Net | Net | Net | |||||
| sales | sales | Before | After | Before | After | sales | sales | asset | asset | asset | asset | |
| charge | charge | CDSC | CDSC | CDSC | CDSC | charge | charge | value | value | value | value | |
| Annual average | ||||||||||||
| (life of fund) | 6.75% | 6.50% | 6.47% | 6.47% | 5.95% | 5.95% | 6.20% | 6.06% | 6.48% | 6.97% | 6.99% | 6.96% |
| 10 years | 9.59 | 3.29 | 3.16 | 3.16 | 1.68 | 1.68 | 4.23 | 0.58 | 6.89 | 12.72 | 13.21 | 12.36 |
| Annual average | 0.92 | 0.32 | 0.31 | 0.31 | 0.17 | 0.17 | 0.42 | 0.06 | 0.67 | 1.20 | 1.25 | 1.17 |
| 5 years | 9.44 | 3.14 | 5.44 | 3.47 | 5.39 | 5.39 | 6.69 | 2.95 | 8.08 | 11.13 | 11.61 | 10.77 |
| Annual average | 1.82 | 0.62 | 1.06 | 0.68 | 1.06 | 1.06 | 1.30 | 0.58 | 1.57 | 2.13 | 2.22 | 2.07 |
| 3 years | 5.57 | –0.50 | 3.21 | 0.21 | 3.22 | 3.22 | 3.98 | 0.34 | 4.76 | 6.52 | 6.88 | 6.33 |
| Annual average | 1.82 | –0.17 | 1.06 | 0.07 | 1.06 | 1.06 | 1.31 | 0.11 | 1.56 | 2.13 | 2.24 | 2.07 |
| 1 year | –13.46 | –18.44 | –14.09 | –18.31 | –14.08 | –14.92 | –13.87 | –16.88 | –13.66 | –13.18 | –13.08 | –13.23 |
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. After-sales-charge returns for class A and M shares reflect the deduction of the maximum 5.75% and 3.50% sales charge, respectively, levied at the time of purchase. Class B share returns after contingent deferred sales charge (CDSC) reflect the applicable CDSC, which is 5% in the first year, declining over time to 1% in the sixth year, and is eliminated thereafter. Class C share returns after CDSC reflect a 1% CDSC for the first year that is eliminated thereafter. Class R, R5, R6, and Y shares have no initial sales charge or CDSC. Performance for class B, C, M, R, and Y shares before their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and the higher operating expenses for such shares, except for class Y shares, for which 12b-1 fees are not applicable. Performance for class R5 and R6 shares prior to their inception is derived from the historical performance of class Y shares and has not been adjusted for the lower investor servicing fees applicable to class R5 and R6 shares; had it, returns would have been higher.
Recent performance may have benefited from one or more legal settlements.
For a portion of the periods, the fund had expense limitations, without which returns would have been lower.
Class B share performance reflects conversion to class A shares after eight years.
| International Equity Fund | 11 |
Comparative index returns For periods ended 6/30/16
| Lipper International | ||
| Multi-Cap Core Funds | ||
| MSCI EAFE Index (ND) | category average* | |
| Annual average (life of fund) | 4.58% | 5.07% |
| 10 years | 16.94 | 17.96 |
| Annual average | 1.58 | 1.55 |
| 5 years | 8.68 | 7.44 |
| Annual average | 1.68 | 1.40 |
| 3 years | 6.32 | 5.65 |
| Annual average | 2.06 | 1.82 |
| 1 year | –10.16 | –9.93 |
Index and Lipper results should be compared with fund performance before sales charge, before CDSC, or at net asset value.
* Over the 1-year, 3-year, 5-year, 10-year, and life-of-fund periods ended 6/30/16, there were 439, 364, 298, 160, and 8 funds, respectively, in this Lipper category.
Past performance does not indicate future results. At the end of the same time period, a $10,000 investment in the fund’s class B and C shares would have been valued at $10,316 and $10,168, respectively, and no contingent deferred sales charges would apply. A $10,000 investment in the fund’s class M shares ($9,650 after sales charge) would have been valued at $10,058. A $10,000 investment in the fund’s class R, R5, R6, and Y shares would have been valued at $10,689, $11,272, $11,321, and $11,236, respectively.
| 12 International Equity Fund |
Fund price and distribution information For the 12-month period ended 6/30/16
| Distributions | Class A | Class B | Class C | Class M | Class R | Class R5 | Class R6 | Class Y | ||
| Number | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | ||
| Income | $0.593 | $0.401 | $0.429 | $0.468 | $0.498 | $0.669 | $0.692 | $0.665 | ||
| Capital gains | — | — | — | — | — | — | — | — | ||
| Total | $0.593 | $0.401 | $0.429 | $0.468 | $0.498 | $0.669 | $0.692 | $0.665 | ||
| Before | After | Net | Net | Before | After | Net | Net | Net | Net | |
| sales | sales | asset | asset | sales | sales | asset | asset | asset | asset | |
| Share value | charge | charge | value | value | charge | charge | value | value | value | value |
| 6/30/15 | $24.31 | $25.79 | $23.14 | $23.47 | $23.64 | $24.50 | $23.87 | $24.66 | $24.69 | $24.61 |
| 6/30/16 | 20.49 | 21.74 | 19.51 | 19.77 | 19.93 | 20.65 | 20.15 | 20.79 | 20.82 | 20.74 |
The classification of distributions, if any, is an estimate. Before-sales-charge share value and current dividend rate for class A and M shares, if applicable, do not take into account any sales charge levied at the time of purchase. After-sales-charge share value, current dividend rate, and current 30-day SEC yield, if applicable, are calculated assuming that the maximum sales charge (5.75% for class A shares and 3.50% for class M shares) was levied at the time of purchase. Final distribution information will appear on your year-end tax forms.
Your fund’s expenses
As a mutual fund investor, you pay ongoing expenses, such as management fees, distribution fees (12b-1 fees), and other expenses. In the most recent six-month period, your fund’s expenses were limited; had expenses not been limited, they would have been higher. 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, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund’s prospectus or talk to your financial representative.
Expense ratios
| Class A | Class B | Class C | Class M | Class R | Class R5 | Class R6 | Class Y | |
| Total annual operating expenses for | ||||||||
| the fiscal year ended 6/30/15* | 1.31% | 2.06% | 2.06% | 1.81% | 1.56% | 0.96% | 0.86% | 1.06% |
| Annualized expense ratio for the | ||||||||
| six-month period ended 6/30/16†‡ | 1.27% | 2.02% | 2.02% | 1.77% | 1.52% | 0.96% | 0.86% | 1.02% |
Fiscal-year expense information in this table is taken from the most recent prospectus, is subject to change, and may differ from that shown for the annualized expense ratio and in the financial highlights of this report.
Expenses are shown as a percentage of average net assets.
* Restated to reflect current fees resulting from a change to the fund’s investor servicing arrangements effective September 1, 2016.
† Expense ratios for each class are for the fund’s most recent fiscal half year. As a result of this, ratios may differ from expense ratios based on one-year data in the financial highlights.
‡ Includes an increase of 0.03% from annualizing the performance fee adjustment for the six months ended 6/30/16.
| International Equity Fund 13 |
Expenses per $1,000
The following table shows the expenses you would have paid on a $1,000 investment in each class of the fund from 1/1/16 to 6/30/16. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses.
| Class A | Class B | Class C | Class M | Class R | Class R5 | Class R6 | Class Y | |
| Expenses paid per $1,000*† | $6.10 | $9.68 | $9.69 | $8.49 | $7.30 | $4.61 | $4.13 | $4.90 |
| Ending value (after expenses) | $931.40 | $928.20 | $928.60 | $929.10 | $930.70 | $933.10 | $933.60 | $932.60 |
* 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 6/30/16. 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.
Estimate the expenses you paid
To estimate the ongoing expenses you paid for the six months ended 6/30/16, use the following calculation method. To find the value of your investment on 1/1/16, call Putnam at 1-800-225-1581.
Compare expenses using the SEC’s method
The Securities and Exchange Commission (SEC) has established guidelines to help investors assess fund expenses. Per these guidelines, the following table shows 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 mutual fund shareholder reports 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.
| Class A | Class B | Class C | Class M | Class R | Class R5 | Class R6 | Class Y | |
| Expenses paid per $1,000*† | $6.37 | $10.12 | $10.12 | $8.87 | $7.62 | $4.82 | $4.32 | $5.12 |
| Ending value (after expenses) | $1,018.55 | $1,014.82 | $1,014.82 | $1,016.06 | $1,017.30 | $1,020.09 | $1,020.59 | $1,019.79 |
* 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 6/30/16. The expense ratio may differ for each share class.
† Expenses are calculated by multiplying the expense ratio by the average account value for the six-month period; then multiplying the result by the number of days in the six-month period; and then dividing that result by the number of days in the year.
| 14 International Equity Fund |
Terms and definitions
Important terms
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.
Before sales charge, or net asset value, is the price, or value, of one share of a mutual fund, without a sales charge. Before-sales-charge figures fluctuate with market conditions, and are calculated by dividing the net assets of each class of shares by the number of outstanding shares in the class.
After sales charge is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. After-sales-charge performance figures shown here assume the 5.75% maximum sales charge for class A shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is generally 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 over time 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.
Share classes
Class A shares are generally subject to an initial sales charge and no CDSC (except on certain redemptions of shares bought without an initial sales charge).
Class B shares are not subject to an initial sales charge and may be subject to a CDSC.
Class C shares are not subject to an initial sales charge and are subject to a CDSC only if the shares are redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no CDSC.
Class R shares are not subject to an initial sales charge or CDSC and are available only to employer-sponsored retirement plans.
Class R5 and R6 shares are not subject to an initial sales charge or CDSC, and carry no 12b-1 fee. They are available only to employer-sponsored retirement plans.
Class Y shares are not subject to an initial sales charge or CDSC, and carry no 12b-1 fee. They are generally only available to corporate and institutional clients and clients in other approved programs.
Comparative indexes
Barclays U.S. Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities.
BofA Merrill Lynch U.S. 3-Month Treasury Bill Index is an unmanaged index that seeks to measure the performance of U.S. Treasury bills available in the marketplace.
MSCI EAFE Index (ND) is an unmanaged index of equity securities from developed countries in Western Europe, the Far East, and Australasia.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index.
Lipper is a third-party industry-ranking entity that ranks mutual funds. Its rankings do not reflect sales charges. Lipper rankings are based on total return at net asset value relative to other funds that have similar current investment styles or objectives as determined by Lipper. Lipper may change a fund’s category assignment at its discretion. Lipper category averages reflect performance trends for funds within a category.
| International Equity Fund 15 |
Other information for shareholders
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, 2016, are available in the Individual Investors section of putnam.com, and on the Securities and Exchange Commission (SEC) 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
The 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 Form N-Q on the SEC’s website at www.sec.gov. In addition, the fund’s Form 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.
Trustee and employee fund ownership
Putnam employees and members of the Board of Trustees place their faith, confidence, and, most importantly, investment dollars in Putnam mutual funds. As of June 30, 2016, Putnam employees had approximately $481,000,000 and the Trustees had approximately $128,000,000 invested in Putnam mutual funds. These amounts include investments by the Trustees’ and employees’ immediate family members as well as investments through retirement and deferred compensation plans.
| 16 International Equity Fund |
Important notice regarding Putnam’s privacy policy
In order to conduct business with our shareholders, we must obtain certain personal information such as account holders’ names, addresses, Social Security numbers, and dates of birth. Using this information, we are able to maintain accurate records of accounts and transactions.
It is our policy to protect the confidentiality of our shareholder information, whether or not a shareholder currently owns shares of our funds. In particular, it is our policy not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use.
Under certain circumstances, we must share account information with outside vendors who provide services to us, such as mailings and proxy solicitations. In these cases, the service providers enter into confidentiality agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. Finally, it is our policy to share account information with your financial representative, if you’ve listed one on your Putnam account.
| International Equity Fund 17 |
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, LLC (“Putnam Management”), the sub-management contract with respect to your fund between Putnam Management and its affiliate, Putnam Investments Limited (“PIL”), and the sub-advisory contract among Putnam Management, PIL, and another affiliate, The Putnam Advisory Company (“PAC”). The Board, 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 discussed with representatives of Putnam Management the annual contract review materials furnished to the Contract Committee during the course of the previous year’s review, identifying 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 and its affiliates 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 2015, 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, as well as supplemental information provided in response to an additional request made by the Contract Committee. 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 2016, the Contract Committee met in executive session to discuss and consider its recommendations with respect to the continuance of the contracts. At the Trustees’ June 24, 2016 meeting, the Contract Committee met in executive session with the other Independent Trustees to review a summary of the key financial, performance and other 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 recommendations. The Contract Committee then recommended, and the Independent Trustees approved, the continuance of your fund’s management, sub-management and sub-advisory contracts, effective July 1, 2016. (Because PIL and PAC are affiliates of Putnam Management and Putnam Management remains fully responsible for all services provided by PIL and PAC, the Trustees have not attempted to evaluate PIL or PAC as separate entities, and all subsequent references to Putnam Management below should be deemed to include reference to PIL and PAC 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
| 18 International Equity Fund |
competitive funds, the costs incurred by Putnam Management in providing services to the fund, and the continued application of certain reductions and waivers noted below; and • That the fee schedule in effect for your fund 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 funds’ current fee arrangements under the management contracts were first implemented at the beginning of 2010 following extensive review by the Contract Committee and discussions with representatives of Putnam Management, as well as approval by shareholders.
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 a few instances, funds have implemented so-called “all-in” management fees covering substantially all routine fund operating costs.) 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 indicate that changes to the management fee structure for your fund would be appropriate at this time.
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 rates 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 appropriate sharing of economies of scale between fund shareholders and Putnam Management.
In addition, your fund’s management contract provides that its management fees will be adjusted up or down depending upon whether your fund’s performance is better or worse than the performance of an appropriate index of securities prices specified in the management contract. In the course of reviewing investment performance, the Trustees examined the operation of your fund’s performance fees and concluded that these fees were operating effectively to align further Putnam Management’s economic interests with those of the fund’s shareholders.
As in the past, the Trustees also focused on the competitiveness of each fund’s total expense ratio. In order to support the effort to have
| International Equity Fund 19 |
fund expenses meet competitive standards, the Trustees and Putnam Management have implemented certain expense limitations that were in effect during your fund’s fiscal year ending in 2015. These expense limitations were: (i) a contractual expense limitation applicable to specified retail open-end funds, including your fund, of 32 basis points on investor servicing fees and expenses and (ii) a contractual expense limitation applicable to specified open-end funds, including your fund, of 20 basis points on so-called “other expenses” (i.e., all expenses exclusive of management fees, distribution fees, investor servicing fees, investment-related expenses, interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses). These expense limitations attempt to maintain competitive expense levels for the funds. Most funds, including your fund, had sufficiently low expenses that these expense limitations were not operative during their fiscal years ending in 2015. Putnam Management has agreed to maintain these expense limitations until at least October 30, 2017 and to reduce the contractual expense limitation on investor servicing fees and expenses from 32 basis points to 25 basis points effective September 1, 2016. Putnam Management’s support for these expense limitation arrangements was an important factor in the Trustees’ decision to approve the continuance of your fund’s management, sub-management and sub-advisory contracts.
The Trustees reviewed comparative fee and expense information for a custom group of competitive funds selected by Lipper Inc. (“Lipper”). 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 second 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 third quintile in total expenses (excluding any applicable 12b-1 fees) as of December 31, 2015. The first quintile represents the least expensive funds and the fifth quintile the most expensive funds. The fee and expense data reported by Lipper as of December 31, 2015 reflected the most recent fiscal year-end data available in Lipper’s database at that time.
In connection with their review of fund management fees and total expenses, 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 between fund shareholders and Putnam Management 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 included information regarding fees charged by Putnam Management and its affiliates to institutional clients such as defined benefit pension plans, college endowments,
| 20 International Equity Fund |
sub-advised third-party mutual funds, and the like. This information included comparisons of those fees with fees charged to the Putnam 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 these clients and the Putnam 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, among other things, 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 other 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 2015 was a year of mixed performance results for the Putnam funds, with generally strong results for the international equity, global sector and global asset allocation funds, but generally disappointing results for the U.S. and small-cap equity, Spectrum and fixed income funds. They noted that the longer-term performance of the Putnam funds generally continued to be strong, exemplified by the fact that the Putnam funds were ranked by the Barron’s/Lipper Fund Families survey as the 18th-best performing mutual fund complex out of 58 complexes for the five-year period ended December 31, 2015. They also noted, however, the disappointing investment performance of some funds for periods ended December 31, 2015 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 a competitive industry ranking of each fund’s total net return over a one-year, three-year and five-year period. For a number of Putnam funds with relatively unique investment mandates for which meaningful competitive performance rankings are not considered to be available, the Trustees evaluated performance based on their total gross and net returns and, in most cases, comparisons of those returns with the returns of selected investment benchmarks. In the case of your fund, the Trustees considered
| International Equity Fund 21 |
that its class A share cumulative total return performance at net asset value was in the following quartiles of its Lipper peer group (Lipper International Multi-Cap Core Funds) for the one-year, three-year and five-year periods ended December 31, 2015 (the first quartile representing the best-performing funds and the fourth quartile the worst-performing funds):
| One-year period | 2nd |
| Three-year period | 1st |
| Five-year period | 1st |
Over the one-year, three-year and five-year periods ended December 31, 2015, there were 410, 340 and 289 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.)
The Trustees also considered Putnam Management’s continued efforts to support fund performance through initiatives including structuring compensation for portfolio managers and research analysts to enhance accountability for fund performance, emphasizing accountability in the portfolio management process, and affirming its commitment to a fundamental-driven approach to investing. The Trustees noted further that Putnam Management continued to strengthen its fundamental research capabilities by adding new investment personnel.
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 (including third-party research and market data) 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, sub-management and sub-advisory 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.
| 22 International Equity Fund |
Financial statements
These sections of the report, as well as the accompanying Notes, preceded by the Report of Independent Registered Public Accounting Firm, constitute the fund’s financial statements.
The fund’s portfolio lists all the fund’s investments and their values as of the last day of the reporting period. Holdings are organized by asset type/and industry sector, country, or state to show areas of concentration and/diversification.
Statement of assets and liabilities shows how the fund’s net assets and share price are determined. All investment and non-investment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the liquidation preference of preferred shares.)
Statement of operations shows the fund’s net investment gain or loss. This is done by first adding up all the fund’s earnings — from dividends and interest income — and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings — as well as any unrealized gains or losses over the period — is added to or subtracted from the net investment result to determine the fund’s net gain or loss for the fiscal year.
Statement of changes in net assets shows how the fund’s net assets were affected by the fund’s net investment gain or loss, 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 highlights table also includes the current reporting period.
| International Equity Fund 23 |
Report of Independent Registered Public Accounting Firm
To the Trustees and Shareholders
of Putnam International Equity Fund:
In our opinion, the accompanying statement of assets and liabilities, including the 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 International Equity Fund (the “fund”) at June 30, 2016, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at June 30, 2016 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 10, 2016
| 24 International Equity Fund |
The fund’s portfolio 6/30/16
| COMMON STOCKS (94.9%)* | Shares | Value |
| Australia (2.6%) | ||
| Australia & New Zealand Banking Group, Ltd. | 577,067 | $10,521,663 |
| Challenger, Ltd. | 1,917,351 | 12,446,847 |
| 22,968,510 | ||
| Belgium (2.0%) | ||
| Anheuser-Busch InBev SA/NV | 136,770 | 17,978,364 |
| 17,978,364 | ||
| Brazil (—%) | ||
| FabFurnish GmbH (acquired 8/2/13, cost $20) (Private) † ΔΔF | 15 | 12 |
| Global Fashion Holding SA (acquired 8/2/13, cost $1,009,308) | ||
| (Private) † ΔΔ F | 23,826 | 170,291 |
| New Bigfoot Other Assets GmbH (acquired 8/2/13, cost $20) | ||
| (Private) † ΔΔ F | 15 | 12 |
| New Middle East Other Assets GmbH (acquired 8/2/13, cost $8) | ||
| (Private) † ΔΔ F | 6 | 5 |
| 170,320 | ||
| Canada (1.1%) | ||
| Magna International, Inc. | 285,400 | 10,018,104 |
| 10,018,104 | ||
| China (3.5%) | ||
| China Mobile, Ltd. | 606,000 | 6,999,351 |
| Ctrip.com International, Ltd. ADR † S | 160,900 | 6,629,080 |
| Skyworth Digital Holdings, Ltd. | 11,059,976 | 9,154,749 |
| Tencent Holdings, Ltd. | 391,700 | 8,923,595 |
| 31,706,775 | ||
| Finland (1.1%) | ||
| Nokia OYJ † | 1,729,794 | 9,829,895 |
| 9,829,895 | ||
| France (9.0%) | ||
| Airbus Group SE | 182,392 | 10,591,212 |
| ArcelorMittal SA † | 1,071,953 | 4,935,374 |
| Natixis SA | 2,244,454 | 8,620,421 |
| Numericable-SFR SA | 318,758 | 8,068,354 |
| Sanofi | 172,961 | 14,538,745 |
| Societe Generale SA | 308,718 | 9,756,351 |
| Valeo SA | 222,193 | 9,923,699 |
| Veolia Environnement SA | 631,105 | 13,710,454 |
| 80,144,610 | ||
| Germany (5.0%) | ||
| Evonik Industries AG | 128,308 | 3,819,058 |
| Henkel AG & Co. KGaA (Preference) | 128,946 | 15,679,766 |
| Rheinmetall AG | 103,354 | 6,103,917 |
| RIB Software AG S | 13,215 | 128,286 |
| Siemens AG | 180,099 | 18,448,990 |
| 44,180,017 | ||
| Hong Kong (0.8%) | ||
| WH Group, Ltd. 144A | 8,605,000 | 6,808,694 |
| 6,808,694 | ||
| India (0.9%) | ||
| Housing Development Finance Corp., Ltd. (HDFC) | 412,626 | 7,699,188 |
| 7,699,188 | ||
| International Equity Fund 25 |
| COMMON STOCKS (94.9%)* cont. | Shares | Value |
| Indonesia (0.8%) | ||
| Matahari Department Store Tbk PT | 4,491,500 | $6,819,295 |
| 6,819,295 | ||
| Ireland (3.0%) | ||
| Bank of Ireland † | 27,305,980 | 5,690,352 |
| Kerry Group PLC Class A | 120,860 | 10,738,271 |
| Permanent TSB Group Holdings PLC † | 650,483 | 1,224,685 |
| Smurfit Kappa Group PLC | 417,763 | 9,260,149 |
| 26,913,457 | ||
| Israel (0.9%) | ||
| Mobileye NV † S | 182,800 | 8,434,392 |
| 8,434,392 | ||
| Italy (5.1%) | ||
| ENI SpA | 520,404 | 8,401,749 |
| Fiat Chrysler Automobiles NV | 1,916,079 | 11,828,030 |
| Luxottica Group SpA | 196,503 | 9,574,675 |
| Mediaset SpA | 2,192,730 | 7,718,363 |
| Telecom Italia SpA RSP | 12,910,033 | 8,306,110 |
| 45,828,927 | ||
| Japan (19.5%) | ||
| AIN Holdings, Inc. | 113,000 | 8,745,193 |
| Astellas Pharma, Inc. | 951,600 | 14,891,865 |
| Daikin Industries, Ltd. | 146,200 | 12,180,787 |
| Japan Airlines Co., Ltd. | 222,400 | 7,138,261 |
| Japan Hotel REIT Investment Corp R | 7,237 | 6,083,471 |
| Japan Tobacco, Inc. | 475,800 | 19,060,834 |
| Kao Corp. | 233,200 | 13,457,728 |
| KDDI Corp. | 341,300 | 10,389,623 |
| LIXIL Group Corp. | 448,800 | 7,378,432 |
| Mitsui Fudosan Co., Ltd. | 433,000 | 9,884,503 |
| Murata Manufacturing Co., Ltd. | 93,200 | 10,455,025 |
| Nintendo Co., Ltd. | 85,500 | 12,199,578 |
| Nippon Telegraph & Telephone Corp. | 391,100 | 18,359,604 |
| NSK, Ltd. | 829,200 | 6,133,058 |
| Sumitomo Mitsui Financial Group, Inc. | 288,000 | 8,257,037 |
| Yamaha Motor Co., Ltd. | 627,400 | 9,500,925 |
| 174,115,924 | ||
| Netherlands (4.8%) | ||
| Akzo Nobel NV | 188,232 | 11,842,260 |
| ING Groep NV GDR | 1,456,460 | 15,138,180 |
| Unilever NV ADR | 350,523 | 16,341,050 |
| 43,321,490 | ||
| Norway (0.8%) | ||
| Orkla ASA | 831,776 | 7,367,705 |
| 7,367,705 | ||
| Spain (2.7%) | ||
| Cellnex Telecom SAU 144A | 409,512 | 6,423,485 |
| Grifols SA ADR S | 600,714 | 10,013,902 |
| International Consolidated Airlines Group SA | 1,512,290 | 7,570,336 |
| 24,007,723 | ||
| 26 International Equity Fund |
| COMMON STOCKS (94.9%)* cont. | Shares | Value |
| Sweden (2.1%) | ||
| Com Hem Holding AB | 1,193,333 | $10,114,126 |
| Swedbank AB Class A | 426,695 | 8,925,425 |
| 19,039,551 | ||
| Switzerland (3.6%) | ||
| LafargeHolcim, Ltd. | 180,079 | 7,522,188 |
| Novartis AG | 296,428 | 24,385,287 |
| 31,907,475 | ||
| United Kingdom (22.9%) | ||
| Admiral Group PLC | 267,908 | 7,312,386 |
| Associated British Foods PLC | 331,261 | 12,010,894 |
| AstraZeneca PLC | 233,337 | 13,890,318 |
| Berkeley Group Holdings PLC | 253,090 | 8,615,689 |
| Compass Group PLC | 815,565 | 15,545,968 |
| Imperial Brands PLC | 260,238 | 14,126,977 |
| Metro Bank PLC † | 194,505 | 4,721,561 |
| Prudential PLC | 894,240 | 15,234,094 |
| Rio Tinto PLC | 493,897 | 15,266,417 |
| Royal Dutch Shell PLC Class A | 1,227,574 | 33,516,940 |
| Shire PLC | 258,227 | 15,901,480 |
| St James’s Place PLC | 639,126 | 6,845,800 |
| Virgin Money Holdings UK PLC | 884,737 | 2,971,315 |
| Vodafone Group PLC | 4,661,356 | 14,190,051 |
| Wolseley PLC | 156,667 | 8,119,294 |
| Worldpay Group PLC † | 653,702 | 2,379,412 |
| WPP PLC | 696,692 | 14,465,210 |
| 205,113,806 | ||
| United States (2.7%) | ||
| Alphabet, Inc. Class C † | 13,411 | 9,281,753 |
| Amazon.com, Inc. † | 12,000 | 8,587,440 |
| KKR & Co. LP | 491,900 | 6,070,046 |
| 23,939,239 | ||
| Total common stocks (cost $861,053,836) | $848,313,461 | |
| PREFERRED STOCKS (1.1%)* | Shares | Value |
| Samsung Electronics Co., Ltd. zero % cum. pfd. | 9,577 | $9,887,123 |
| Total preferred stocks (cost $9,618,717) | $9,887,123 | |
| U.S. TREASURY OBLIGATIONS (0.2%)* | Principal amount | Value |
| U.S. Treasury Inflation Protected Securities | ||
| 0.625%, February 15, 2043 i | $139,406 | $136,038 |
| 2.125%, February 15, 2041 i | 98,300 | 130,512 |
| U.S. Treasury Notes | ||
| 1.375%, October 31, 2020 i | 692,000 | 706,124 |
| 1.500%, February 28, 2023 i | 349,000 | 355,893 |
| 0.750%, October 31, 2017 i | 186,000 | 186,722 |
| Total U.S. treasury obligations (cost $1,515,289) | $1,515,289 | |
| International Equity Fund 27 |
| PURCHASED OPTIONS | Expiration date/ | Contract | |
| OUTSTANDING (—%)* | strike price | amount | Value |
| FTSE 100 Index (Put) | Jul-16/5,755.96 | GBP 20,734 | $130,709 |
| Total purchased options outstanding (cost $3,264,424) | $130,709 | ||
| SHORT-TERM INVESTMENTS (6.9%)* | Principal amount/shares | Value | |
| Putnam Cash Collateral Pool, LLC 0.64% d | Shares | 18,332,127 | $18,332,127 |
| Putnam Short Term Investment Fund 0.47% L | Shares | 37,820,197 | 37,820,197 |
| SSgA Prime Money Market Fund Class N 0.39% P | Shares | 2,390,000 | 2,390,000 |
| U.S. Treasury Bills 0.27%, August 18, 2016 # | $279,000 | 278,915 | |
| U.S. Treasury Bills 0.20%, August 11, 2016 # Δ | 1,295,000 | 1,294,700 | |
| U.S. Treasury Bills 0.20%, July 21, 2016 Δ | 290,000 | 289,970 | |
| U.S. Treasury Bills 0.24%, July 14, 2016 | 51,000 | 50,998 | |
| U.S. Treasury Bills 0.22%, July 7, 2016 | 1,237,000 | 1,236,988 | |
| Total short-term investments (cost $61,693,862) | $61,693,895 | ||
| TOTAL INVESTMENTS | |||
| Total investments (cost $937,146,128) | $921,540,477 | ||
| Key to holding’s currency abbreviations | |
| GBP | British Pound |
| USD/$ | United States Dollar |
| Key to holding’s abbreviations | |
| ADR | American Depository Receipts: represents ownership of foreign securities on deposit with a custodian bank |
| GDR | Global 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 July 1, 2015 through June 30, 2016 (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 $894,269,658.
† This security is non-income-producing.
ΔΔ This security is restricted with regard to public resale. The total fair value of this security and any other restricted securities (excluding 144A securities), if any, held at the close of the reporting period was $170,320, or less than 0.1% of net assets.
# This security, in part or in entirety, was pledged and segregated with the broker to cover margin requirements for futures contracts at the close of the reporting period.
Δ This security, in part or in entirety, was pledged and segregated with the custodian for collateral on certain derivative contracts at the close of the reporting period.
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.
F This security is valued by Putnam Management at fair value following procedures approved by the Trustees. Securities may be classified as Level 2 or Level 3 for ASC 820 based on the securities’ valuation inputs. At the close of the reporting period, fair value pricing was also used for certain foreign securities in the portfolio (Note 1).
i This security was pledged, or purchased with cash that was pledged, to the fund for collateral on certain derivative contracts (Note 1).
| 28 International Equity Fund |
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.
P This security was pledged, or purchased with cash that was pledged, to the fund for collateral on certain derivative contracts. The rate quoted in the security description is the annualized 7-day yield of the fund at the close of the reporting period (Note 1).
R Real Estate Investment Trust.
S Security on loan, in part or in entirety, at the close of the reporting period (Note 1).
At the close of the reporting period, the fund maintained liquid assets totaling $363,631 to cover certain derivative contracts and the settlement of certain securities.
Unless otherwise noted, the rates quoted in Short-term investments security descriptions represent the weighted average yield to maturity.
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.
The fund had the following sector concentrations greater than 10% at the close of the reporting period (as a percentage of net assets):
| Financials | 16.5% |
| Consumer staples | 15.9 |
| Consumer discretionary | 14.4 |
| Health care | 10.5 |
| FORWARD CURRENCY CONTRACTS at 6/30/16 (aggregate face value $263,525,023) | ||||||
| Unrealized | ||||||
| Contract | Delivery | Aggregate | appreciation/ | |||
| Counterparty | Currency | type | date | Value | face value | (depreciation) |
| Bank of America N.A. | ||||||
| Australian Dollar | Buy | 7/21/16 | $12,094,223 | $12,277,157 | $(182,934) | |
| British Pound | Sell | 9/21/16 | 462,153 | 500,642 | 38,489 | |
| Barclays Bank PLC | ||||||
| Canadian Dollar | Buy | 7/21/16 | 4,717,830 | 4,642,950 | 74,880 | |
| Euro | Sell | 9/21/16 | 12,636,668 | 12,767,698 | 131,030 | |
| Hong Kong Dollar | Sell | 8/18/16 | 248,267 | 248,278 | 11 | |
| Japanese Yen | Buy | 8/18/16 | 4,068,576 | 3,957,097 | 111,479 | |
| Singapore Dollar | Buy | 8/18/16 | 2,973,038 | 2,979,394 | (6,356) | |
| Swiss Franc | Buy | 9/21/16 | 6,471,150 | 6,393,138 | 78,012 | |
| Citibank, N.A. | ||||||
| Australian Dollar | Buy | 7/21/16 | 10,479,186 | 10,813,070 | (333,884) | |
| British Pound | Sell | 9/21/16 | 2,377,644 | 2,518,057 | 140,413 | |
| Danish Krone | Buy | 9/21/16 | 15,998,087 | 16,030,379 | (32,292) | |
| Japanese Yen | Sell | 8/18/16 | 265,195 | 268,772 | 3,577 | |
| New Zealand Dollar | Sell | 7/21/16 | 567,023 | 606,103 | 39,080 | |
| Credit Suisse International | ||||||
| Australian Dollar | Buy | 7/21/16 | 10,787,912 | 11,063,229 | (275,317) | |
| British Pound | Sell | 9/21/16 | 8,165,418 | 8,838,070 | 672,652 | |
| Chinese Yuan | ||||||
| (Offshore) | Sell | 8/18/16 | 29,422,993 | 30,140,591 | 717,598 | |
| Euro | Sell | 9/21/16 | 10,090,483 | 10,167,577 | 77,094 | |
| International Equity Fund 29 |
| FORWARD CURRENCY CONTRACTS at 6/30/16 (aggregate face value $263,525,023) cont. | ||||||
| Unrealized | ||||||
| Contract | Delivery | Aggregate | appreciation/ | |||
| Counterparty | Currency | type | date | Value | face value | (depreciation) |
| Credit Suisse International cont. | ||||||
| Japanese Yen | Buy | 8/18/16 | $757,331 | $733,387 | $23,944 | |
| New Zealand Dollar | Sell | 7/21/16 | 2,898,039 | 2,774,056 | (123,983) | |
| Norwegian Krone | Buy | 9/21/16 | 447,501 | 449,079 | (1,578) | |
| Swiss Franc | Buy | 9/21/16 | 10,698,845 | 10,505,517 | 193,328 | |
| Goldman Sachs International | ||||||
| Australian Dollar | Sell | 7/21/16 | 74,536 | 75,771 | 1,235 | |
| British Pound | Sell | 9/21/16 | 4,675,621 | 5,061,650 | 386,029 | |
| Japanese Yen | Buy | 8/18/16 | 2,339,367 | 2,109,784 | 229,583 | |
| HSBC Bank USA, National Association | ||||||
| British Pound | Sell | 9/21/16 | 8,466,770 | 9,165,061 | 698,291 | |
| Euro | Sell | 9/21/16 | 7,944,826 | 8,002,807 | 57,981 | |
| New Zealand Dollar | Buy | 7/21/16 | 5,214,144 | 4,965,531 | 248,613 | |
| JPMorgan Chase Bank N.A. | ||||||
| British Pound | Sell | 9/21/16 | 305,881 | 342,607 | 36,726 | |
| Canadian Dollar | Buy | 7/21/16 | 3,296,010 | 3,024,997 | 271,013 | |
| Euro | Sell | 9/21/16 | 7,019,122 | 7,105,152 | 86,030 | |
| Japanese Yen | Buy | 8/18/16 | 1,649,967 | 1,761,960 | (111,993) | |
| Norwegian Krone | Sell | 9/21/16 | 2,235,405 | 2,297,556 | 62,151 | |
| Singapore Dollar | Buy | 8/18/16 | 9,325,156 | 9,349,055 | (23,899) | |
| South Korean Won | Sell | 8/18/16 | 9,255,141 | 9,291,002 | 35,861 | |
| Swedish Krona | Buy | 9/21/16 | 6,064,430 | 6,198,574 | (134,144) | |
| Swiss Franc | Buy | 9/21/16 | 8,364,253 | 8,269,122 | 95,131 | |
| State Street Bank and Trust Co. | ||||||
| Australian Dollar | Buy | 7/21/16 | 502,221 | 514,717 | (12,496) | |
| British Pound | Sell | 9/21/16 | 2,369,518 | 2,961,369 | 591,851 | |
| Euro | Sell | 9/21/16 | 8,604,660 | 8,669,126 | 64,466 | |
| Israeli Shekel | Sell | 7/21/16 | 883,025 | 853,261 | (29,764) | |
| Japanese Yen | Buy | 8/18/16 | 55,785 | 54,179 | 1,606 | |
| Norwegian Krone | Buy | 9/21/16 | 7,168 | 7,186 | (18) | |
| Swedish Krona | Sell | 9/21/16 | 56,546 | 57,993 | 1,447 | |
| Swiss Franc | Buy | 9/21/16 | 4,767,626 | 4,712,472 | 55,154 | |
| UBS AG | ||||||
| Australian Dollar | Buy | 7/21/16 | 178,737 | 183,927 | (5,190) | |
| British Pound | Sell | 9/21/16 | 9,295,822 | 10,063,611 | 767,789 | |
| Euro | Sell | 9/21/16 | 2,597,156 | 2,613,115 | 15,959 | |
| Swiss Franc | Buy | 9/21/16 | 7,241,084 | 7,139,197 | 101,887 | |
| Total | $4,836,542 | |||||
| 30 International Equity Fund |
| FUTURES CONTRACTS OUTSTANDING at 6/30/16 | ||||
| Unrealized | ||||
| Number of | Expiration | appreciation/ | ||
| contracts | Value | date | (depreciation) | |
| MSCI EAFE Index Mini (Long) | 110 | $8,883,600 | Sep-16 | $540,721 |
| Total | $540,721 | |||
| WRITTEN OPTIONS OUTSTANDING at 6/30/16 (premiums $2,420,984) | |||
| Expiration date/ | Contract | ||
| strike price | amount | Value | |
| FTSE 100 Index (Put) | Jul-16/5,634.78 | GBP 20,734 | $74,448 |
| Total | $74,448 | ||
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: | |||
| Australia | $— | $22,968,510 | $— |
| Belgium | — | 17,978,364 | — |
| Brazil | — | — | 170,320 |
| Canada | 10,018,104 | — | — |
| China | 6,629,080 | 25,077,695 | — |
| Finland | — | 9,829,895 | — |
| France | — | 80,144,610 | — |
| Germany | — | 44,180,017 | — |
| Hong Kong | — | 6,808,694 | — |
| India | — | 7,699,188 | — |
| Indonesia | — | 6,819,295 | — |
| Ireland | — | 26,913,457 | — |
| Israel | 8,434,392 | — | — |
| Italy | — | 45,828,927 | — |
| Japan | — | 174,115,924 | — |
| Netherlands | — | 43,321,490 | — |
| Norway | — | 7,367,705 | — |
| Spain | 10,013,902 | 13,993,821 | — |
| Sweden | — | 19,039,551 | — |
| Switzerland | — | 31,907,475 | — |
| United Kingdom | — | 205,113,806 | — |
| United States | 23,939,239 | — | — |
| Total common stocks | $59,034,717 | $789,108,424 | $170,320 |
| International Equity Fund 31 |
| Valuation inputs | |||
| Investments in securities: | Level 1 | Level 2 | Level 3 |
| Preferred stocks | $— | $9,887,123 | $— |
| Purchased options outstanding | — | 130,709 | — |
| U.S. treasury obligations | — | 1,515,289 | — |
| Short-term investments | 40,210,197 | 21,483,698 | — |
| Totals by level | $99,244,914 | $822,125,243 | $170,320 |
| Valuation inputs | |||
| Other financial instruments: | Level 1 | Level 2 | Level 3 |
| Forward currency contracts | $— | $4,836,542 | $— |
| Futures contracts | 540,721 | — | — |
| Written options outstanding | — | (74,448) | — |
| Totals by level | $540,721 | $4,762,094 | $— |
During the reporting period, transfers within the fair value hierarchy, if any (other than certain transfers involving non-U.S. equity securities as described in Note 1), did not represent, in the aggregate, more than 1% of the fund’s net assets measured as of the end of the period. Transfers are accounted for using the end of period pricing valuation method.
At the start and close of the reporting period, Level 3 investments in securities represented less than 1% of the fund’s net assets and were not considered a significant portion of the fund’s portfolio.
The accompanying notes are an integral part of these financial statements.
| 32 International Equity Fund |
Statement of assets and liabilities 6/30/16
| ASSETS | |
| Investment in securities, at value, including $18,935,777 of securities on loan (Note 1): | |
| Unaffiliated issuers (identified cost $880,993,804) | $865,388,153 |
| Affiliated issuers (identified cost $56,152,324) (Notes 1 and 5) | 56,152,324 |
| Foreign currency (cost $790,027) (Note 1) | 788,371 |
| Dividends, interest and other receivables | 2,760,516 |
| Receivable for shares of the fund sold | 6,856,627 |
| Receivable for investments sold | 3,444,639 |
| Receivable for variation margin (Note 1) | 180,812 |
| Unrealized appreciation on forward currency contracts (Note 1) | 6,110,390 |
| Prepaid assets | 50,494 |
| Total assets | 941,732,326 |
| LIABILITIES | |
| Payable for investments purchased | 17,414,412 |
| Payable for shares of the fund repurchased | 4,224,378 |
| Payable for compensation of Manager (Note 2) | 514,155 |
| Payable for custodian fees (Note 2) | 39,921 |
| Payable for investor servicing fees (Note 2) | 286,832 |
| Payable for Trustee compensation and expenses (Note 2) | 656,335 |
| Payable for administrative services (Note 2) | 3,555 |
| Payable for distribution fees (Note 2) | 479,792 |
| Unrealized depreciation on forward currency contracts (Note 1) | 1,273,848 |
| Written options outstanding, at value (premiums $2,420,984) (Notes 1 and 3) | 74,448 |
| Collateral on securities loaned, at value (Note 1) | 18,332,127 |
| Collateral on certain derivative contracts, at value (Note 1) | 3,905,289 |
| Other accrued expenses | 257,576 |
| Total liabilities | 47,462,668 |
| Net assets | $894,269,658 |
| REPRESENTED BY | |
| Paid-in capital (Unlimited shares authorized) (Notes 1 and 4) | $2,160,643,715 |
| Undistributed net investment income (Note 1) | 11,265,370 |
| Accumulated net realized loss on investments and foreign currency transactions (Note 1) | (1,269,620,099) |
| Net unrealized depreciation of investments and assets and liabilities in foreign currencies | (8,019,328) |
| Total — Representing net assets applicable to capital shares outstanding | $894,269,658 |
(Continued on next page)
| International Equity Fund 33 |
Statement of assets and liabilities (Continued)
| COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE | |
| Net asset value and redemption price per class A share | |
| ($647,863,983 divided by 31,615,297 shares) | $20.49 |
| Offering price per class A share (100/94.25 of $20.49)* | $21.74 |
| Net asset value and offering price per class B share ($10,121,317 divided by 518,835 shares)** | $19.51 |
| Net asset value and offering price per class C share ($47,140,983 divided by 2,384,966 shares)** | $19.77 |
| Net asset value and redemption price per class M share ($10,246,526 divided by 514,083 shares) | $19.93 |
| Offering price per class M share (100/96.50 of $19.93)* | $20.65 |
| Net asset value, offering price and redemption price per class R share | |
| ($2,962,322 divided by 147,044 shares) | $20.15 |
| Net asset value, offering price and redemption price per class R5 share | |
| ($16,210,778 divided by 779,642 shares) | $20.79 |
| Net asset value, offering price and redemption price per class R6 share | |
| ($66,136,186 divided by 3,176,328 shares) | $20.82 |
| Net asset value, offering price and redemption price per class Y share | |
| ($93,587,563 divided by 4,511,577 shares) | $20.74 |
* On single retail sales of less than $50,000. On sales of $50,000 or more 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.
| 34 International Equity Fund |
Statement of operations Year ended 6/30/16
| INVESTMENT INCOME | |||
| Dividends (net of foreign taxes paid and refunded of $1,621,850) | $26,178,448 | ||
| Interest (including interest income of $49,004 from investments in affiliated issuers) (Note 5) | 49,726 | ||
| Securities lending (Note 1) | 112,924 | ||
| Total investment income | 26,341,098 | ||
| EXPENSES | |||
| Compensation of Manager (Note 2) | 6,974,961 | ||
| Investor servicing fees (Note 2) | 1,875,328 | ||
| Custodian fees (Note 2) | 145,438 | ||
| Trustee compensation and expenses (Note 2) | 77,406 | ||
| Distribution fees (Note 2) | 2,569,718 | ||
| Administrative services (Note 2) | 26,839 | ||
| Other | 552,679 | ||
| Fees waived and reimbursed by Manager (Note 2) | (12,233) | ||
| Total expenses | 12,210,136 | ||
| Expense reduction (Note 2) | (107,093) | ||
| Net expenses | 12,103,043 | ||
| Net investment income | 14,238,055 | ||
| Net realized loss on investments (Notes 1 and 3) | (67,931,738) | ||
| Net realized loss on futures contracts (Note 1) | (735,797) | ||
| Net realized gain on foreign currency transactions (Note 1) | 5,900,361 | ||
| Net unrealized appreciation of assets and liabilities in foreign currencies during the year | 3,239,982 | ||
| Net unrealized depreciation of investments, futures contracts, and written options | |||
| during the year | (94,746,550) | ||
| Net loss on investments | (154,273,742) | ||
| Net decrease in net assets resulting from operations | $(140,035,687) | ||
The accompanying notes are an integral part of these financial statements.
| International Equity Fund 35 |
Statement of changes in net assets
| DECREASE IN NET ASSETS | Year ended 6/30/16 | Year ended 6/30/15 |
| Operations: | ||
| Net investment income | $14,238,055 | $11,927,381 |
| Net realized gain (loss) on investments | ||
| and foreign currency transactions | (62,767,174) | 69,671,698 |
| Net unrealized depreciation of investments and assets | ||
| and liabilities in foreign currencies | (91,506,568) | (120,520,488) |
| Net decrease in net assets resulting from operations | (140,035,687) | (38,921,409) |
| Distributions to shareholders (Note 1): | ||
| From ordinary income | ||
| Net investment income | ||
| Class A | (19,145,311) | (7,318,368) |
| Class B | (231,272) | (8,116) |
| Class C | (1,071,960) | (99,934) |
| Class M | (279,828) | (67,156) |
| Class R | (65,021) | (29,098) |
| Class R5 | (567,566) | (96,950) |
| Class R6 | (553,438) | (216,948) |
| Class Y | (2,873,661) | (820,119) |
| Increase (decrease) from capital share transactions (Note 4) | 1,277,845 | (7,959,184) |
| Total decrease in net assets | (163,545,899) | (55,537,282) |
| NET ASSETS | ||
| Beginning of year | 1,057,815,557 | 1,113,352,839 |
| End of year (including undistributed net investment income | ||
| of $11,265,370 and $16,069,903, respectively) | $894,269,658 | $1,057,815,557 |
The accompanying notes are an integral part of these financial statements.
| 36 International Equity Fund |
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| International Equity Fund 37 |
Financial highlights (For a common share outstanding throughout the period)
| INVESTMENT OPERATIONS: | LESS DISTRIBUTIONS: | RATIOS AND SUPPLEMENTAL DATA: | ||||||||||||
| Ratio | Ratio | |||||||||||||
| Net realized | of expenses | of net investment | ||||||||||||
| Net asset value, | and unrealized | Total from | From | From | Total return | Net assets, | to average | income (loss) | Portfolio | |||||
| beginning | Net investment | gain (loss) | investment | net investment | return | Total | Non-recurring | Net asset value, | at net asset | end of period | net assets | to average | turnover | |
| Period ended | of period | income (loss) a | on investments | operations | income | of capital | distributions | reimbursements | end of period | value (%) b | (in thousands) | (%) c | net assets (%) | (%) |
| Class A | ||||||||||||||
| June 30, 2016 | $24.31 | .32 | (3.55) | (3.23) | (.59) | — | (.59) | — | $20.49 | (13.46) | $647,864 | 1.27d | 1.47d | 77 |
| June 30, 2015 | 25.33 | .29 | (1.09) | (.80) | (.22) | — | (.22) | — | 24.31 | (3.12) | 834,109 | 1.26 | 1.19 | 69 |
| June 30, 2014 | 20.26 | .20 | 5.01 | 5.21 | (.17) | — | (.17) | .03 f | 25.33 | 25.92 | 919,776 | 1.30 | .83 | 67 |
| June 30, 2013 | 16.78 | .20 | 3.47 | 3.67 | (.19) | — | (.19) | — | 20.26 | 21.92 | 800,600 | 1.32 | 1.06 | 86 |
| June 30, 2012 | 20.93 | .23 | (3.72) | (3.49) | (.89) | (.07) | (.96) | .30h,i | 16.78 | (14.98) | 785,933 | 1.36 | 1.32 | 67 |
| Class B | ||||||||||||||
| June 30, 2016 | $23.14 | .14 | (3.37) | (3.23) | (.40) | — | (.40) | — | $19.51 | (14.09) | $10,121 | 2.02d | .66d | 77 |
| June 30, 2015 | 24.08 | .09 | (1.02) | (.93) | (.01) | — | (.01) | — | 23.14 | (3.86) | 14,821 | 2.01 | .39 | 69 |
| June 30, 2014 | 19.27 | .01 | 4.77 | 4.78 | — | — | — | .03 f | 24.08 | 24.96 | 20,183 | 2.05 | .03 | 67 |
| June 30, 2013 | 15.95 | .05 | 3.30 | 3.35 | (.03) | — | (.03) | — | 19.27 | 21.04 | 21,761 | 2.07 | .27 | 86 |
| June 30, 2012 | 19.85 | .08 | (3.51) | (3.43) | (.71) | (.05) | (.76) | .29h,i | 15.95 | (15.60) | 25,547 | 2.11 | .50 | 67 |
| Class C | ||||||||||||||
| June 30, 2016 | $23.47 | .15 | (3.42) | (3.27) | (.43) | — | (.43) | — | $19.77 | (14.08) | $47,141 | 2.02d | .72d | 77 |
| June 30, 2015 | 24.45 | .11 | (1.05) | (.94) | (.04) | — | (.04) | — | 23.47 | (3.83) | 59,397 | 2.01 | .46 | 69 |
| June 30, 2014 | 19.58 | .02 | 4.83 | 4.85 | (.01) | — | (.01) | .03 f | 24.45 | 24.93 | 61,686 | 2.05 | .08 | 67 |
| June 30, 2013 | 16.22 | .06 | 3.35 | 3.41 | (.05) | — | (.05) | — | 19.58 | 21.03 | 53,981 | 2.07 | .31 | 86 |
| June 30, 2012 | 20.23 | .10 | (3.60) | (3.50) | (.74) | (.06) | (.80) | .29h,i | 16.22 | (15.64) | 53,807 | 2.11 | .57 | 67 |
| Class M | ||||||||||||||
| June 30, 2016 | $23.64 | .19 | (3.43) | (3.24) | (.47) | — | (.47) | — | $19.93 | (13.87) | $10,247 | 1.77d | .90d | 77 |
| June 30, 2015 | 24.64 | .15 | (1.05) | (.90) | (.10) | — | (.10) | — | 23.64 | (3.65) | 15,078 | 1.76 | .66 | 69 |
| June 30, 2014 | 19.72 | .08 | 4.88 | 4.96 | (.07) | — | (.07) | .03 f | 24.64 | 25.30 | 18,269 | 1.80 | .33 | 67 |
| June 30, 2013 | 16.34 | .10 | 3.37 | 3.47 | (.09) | — | (.09) | — | 19.72 | 21.26 | 16,006 | 1.82 | .55 | 86 |
| June 30, 2012 | 20.38 | .14 | (3.62) | (3.48) | (.79) | (.06) | (.85) | .29h,i | 16.34 | (15.39) | 16,826 | 1.86 | .83 | 67 |
| Class R | ||||||||||||||
| June 30, 2016 | $23.87 | .27 | (3.49) | (3.22) | (.50) | — | (.50) | — | $20.15 | (13.66) | $2,962 | 1.52d | 1.23d | 77 |
| June 30, 2015 | 24.90 | .23 | (1.08) | (.85) | (.18) | — | (.18) | — | 23.87 | (3.37) | 4,454 | 1.51 | .99 | 69 |
| June 30, 2014 | 19.94 | .14 | 4.92 | 5.06 | (.13) | — | (.13) | .03 f | 24.90 | 25.57 | 3,478 | 1.55 | .59 | 67 |
| June 30, 2013 | 16.52 | .16 | 3.40 | 3.56 | (.14) | — | (.14) | — | 19.94 | 21.62 | 2,743 | 1.57 | .84 | 86 |
| June 30, 2012 | 20.61 | .16 | (3.64) | (3.48) | (.84) | (.07) | (.91) | .30h,i | 16.52 | (15.17) | 2,261 | 1.61 | .94 | 67 |
| Class R5 | ||||||||||||||
| June 30, 2016 | $24.66 | .40 | (3.60) | (3.20) | (.67) | — | (.67) | — | $20.79 | (13.18) | $16,211 | .96d | 1.81d | 77 |
| June 30, 2015 | 25.72 | .44 | (1.19) | (.75) | (.31) | — | (.31) | — | 24.66 | (2.84) | 19,900 | .96 | 1.79 | 69 |
| June 30, 2014 | 20.58 | .63e | 4.73 | 5.36 | (.26) | — | (.26) | .04 f | 25.72 | 26.28 | 8,002 | .98 | 2.48e | 67 |
| June 30, 2013† | 17.12 | .29 | 3.38 | 3.67 | (.21) | — | (.21) | — | 20.58 | 21.51* | 12 | .94* | 1.49* | 86 |
| Class R6 | ||||||||||||||
| June 30, 2016 | $24.69 | .59 | (3.77) | (3.18) | (.69) | — | (.69) | — | $20.82 | (13.08) | $66,136 | .86d | 2.75d | 77 |
| June 30, 2015 | 25.74 | .39 | (1.12) | (.73) | (.32) | — | (.32) | — | 24.69 | (2.75) | 17,443 | .86 | 1.61 | 69 |
| June 30, 2014 | 20.59 | .31 | 5.08 | 5.39 | (.28) | — | (.28) | .04 f | 25.74 | 26.44 | 17,762 | .88 | 1.28 | 67 |
| June 30, 2013† | 17.12 | .56g | 3.13 | 3.69 | (.22) | — | (.22) | — | 20.59 | 21.62* | 13,856 | .84* | 2.63*g | 86 |
| Class Y | ||||||||||||||
| June 30, 2016 | $24.61 | .40 | (3.60) | (3.20) | (.67) | — | (.67) | — | $20.74 | (13.23) | $93,588 | 1.02d | 1.79d | 77 |
| June 30, 2015 | 25.66 | .36 | (1.12) | (.76) | (.29) | — | (.29) | — | 24.61 | (2.91) | 92,613 | 1.01 | 1.49 | 69 |
| June 30, 2014 | 20.52 | .26 | 5.07 | 5.33 | (.23) | — | (.23) | .04 f | 25.66 | 26.21 | 64,196 | 1.05 | 1.09 | 67 |
| June 30, 2013 | 17.00 | .24 | 3.52 | 3.76 | (.24) | — | (.24) | — | 20.52 | 22.19 | 53,813 | 1.07 | 1.27 | 86 |
| June 30, 2012 | 21.20 | .28 | (3.77) | (3.49) | (.94) | (.07) | (1.01) | .30h,i | 17.00 | (14.74) | 57,769 | 1.11 | 1.56 | 67 |
See notes to financial highlights at the end of this section.
The accompanying notes are an integral part of these financial statements.
| 38 International Equity Fund | International Equity Fund 39 |
Financial highlights (Continued)
* Not annualized.
† For the period July 3, 2012 (commencement of operations) to June 30, 2013.
a Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding during the period.
b Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
c Includes amounts paid through expense offset and brokerage/service arrangements, if any (Note 2). Also excludes acquired fund fees and expenses, if any.
d Reflects a voluntary waiver of certain fund expenses in effect during the period. As a result of such waivers, the expenses of each class reflect a reduction of less than 0.01% as a percentage of average net assets (Note 2):
e The net investment income ratio and per share amount shown for the period ended June 30, 2014 may not correspond with the expected class specific differences for the period due to the timing of subscriptions into the class.
f Reflects a non-recurring reimbursement pursuant to a settlement between the Securities and Exchange Commission (the SEC) and Morgan Stanley & Co. which amounted to the following per share outstanding on November 27, 2013.
| Per share | |
| Class A | $0.03 |
| Class B | 0.03 |
| Class C | 0.03 |
| Class M | 0.03 |
| Class R | 0.03 |
| Class R5 | 0.04 |
| Class R6 | 0.04 |
| Class Y | 0.04 |
g The net investment income ratio and per share amount shown for the period ended June 30, 2013 may not correspond with the expected class specific differences for the period due to the timing of subscriptions into the class.
h Reflects a non-recurring reimbursement pursuant to a settlement between the SEC and Canadian Imperial Holdings, Inc. and CIBC World Markets Corp. which amounted to $0.03 per share outstanding on November 29, 2011.
i Reflects a non-recurring reimbursement related to restitution amounts in connection with a distribution plan approved by the SEC, which amounted to the following per share outstanding on July 21, 2011:
| Per share | |
| Class A | $0.27 |
| Class B | 0.26 |
| Class C | 0.26 |
| Class M | 0.26 |
| Class R | 0.27 |
| Class Y | 0.27 |
This payment resulted in an increase to total returns of 1.36% for the year ended June 30, 2012.
The accompanying notes are an integral part of these financial statements.
| 40 International Equity Fund |
Notes to financial statements 6/30/16
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 July 1, 2015 through June 30, 2016.
Putnam International Equity Fund (the fund) is a Massachusetts business trust, which is registered under the Investment Company Act of 1940, as amended, as a diversified open-end management investment company. The goal of the fund is to seek capital appreciation. The fund invests mainly in common stocks (growth or value stocks or both) of large and midsize companies outside the United States that Putnam Management believes have favorable investment potential. For example, the fund may purchase stocks of companies with stock prices that reflect a value lower than that which Putnam Management places on the company. Under normal circumstances, Putnam Management invests at least 80% of the fund’s net assets in equity investments. This policy may be changed only after 60 days’ notice to shareholders. Putnam Management may also consider other factors that it believes will cause the stock price to rise. The fund invests mainly in developed countries, but may invest in emerging markets. 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 A, class B, class C, class M, class R, class R5, class R6 and class Y shares. Class A and class M shares are sold with a maximum front-end sales charge of 5.75% and 3.50%, respectively. Class A shares generally are not subject to a contingent deferred sales charge, and class M (effective November 1, 2015), class R, class R5, class R6 and class Y shares are not subject to a contingent deferred sales charge. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase. Class C shares have a one-year 1.00% contingent deferred sales charge and do not convert to class A shares. Class R shares, which are not available to all investors, are sold at net asset value. The expenses for class A, class B, class C, class M and class R shares may differ based on the distribution fee of each class, which is identified in Note 2. Class R5, class R6 and class Y shares, which are sold at net asset value, are generally subject to the same expenses as class A, class B, class C, class M and class R shares, but do not bear a distribution fee and in the case of class R5 and class R6 shares, bear a lower investor servicing fee, which is identified in Note 2. Class R5, class R6 and class Y shares are not available to all investors.
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.
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent and custodian, who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the fund’s Declaration of Trust, any claims asserted against or on behalf of the Putnam Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
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.
| International Equity Fund 41 |
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 Portfolio securities and other investments are valued using policies and procedures adopted by the Board of Trustees. The Trustees have formed a Pricing Committee to oversee the implementation of these procedures and have delegated responsibility for valuing the fund’s assets in accordance with these procedures to Putnam Management. Putnam Management has established an internal Valuation Committee that is responsible for making fair value determinations, evaluating the effectiveness of the pricing policies of the fund and reporting to the Pricing Committee.
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.
Market quotations are not considered to be readily available for certain debt obligations (including short-term investments with remaining maturities of 60 days or less) and other investments; such investments are valued on the basis of valuations furnished by an independent pricing service approved by the Trustees or dealers selected by Putnam Management. Such services or dealers determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships, generally recognized by institutional traders, between securities (which consider such factors as security prices, yields, maturities and ratings). These securities will generally be categorized as Level 2.
Many securities markets and exchanges outside the U.S. close prior to the scheduled 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 scheduled 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 in accordance with policies and procedures approved by the Trustees. 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, recovery rates, sales and other multiples and resale restrictions. These securities are classified as Level 2 or as Level 3 depending on the priority of the significant inputs.
To assess the continuing appropriateness of fair valuations, the Valuation Committee reviews and affirms the reasonableness of such valuations on a regular basis after considering all relevant information that is reasonably available. 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.
| 42 International Equity Fund |
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 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 fair 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.
Options contracts The fund uses options contracts to hedge against changes in values of securities it owns, owned or expects to own and to manage downside risks.
The potential risk to the fund is that the change in value of options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contracts, if interest or exchange rates move unexpectedly or if the counterparty to the contract is unable to perform. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments.
Exchange-traded options are valued at the last sale price or, if no sales are reported, the last bid price for purchased options and the last ask price for written options. OTC traded options are valued using prices supplied by dealers.
Options on swaps are similar to options on securities except that the premium paid or received is to buy or grant the right to enter into a previously agreed upon interest rate or credit default contract. Forward premium swap option contracts include premiums that have extended settlement dates. The delayed settlement of the premiums is factored into the daily valuation of the option contracts. In the case of interest rate cap and floor contracts, in return for a premium, ongoing payments between two parties are based on interest rates exceeding a specified rate, in the case of a cap contract, or falling below a specified rate in the case of a floor contract.
Written option contracts outstanding at period end, if any, are listed after the fund’s portfolio.
Futures contracts The fund uses futures contracts to manage exposure to market risk.
The potential risk to the fund is that the change in value of futures contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, if interest or exchange rates move unexpectedly or if the counterparty to the contract is unable to perform. With futures, there is minimal counterparty credit risk to the fund since futures are exchange traded and the exchange’s clearinghouse, as counterparty to all exchange traded futures, guarantees the futures against default. Risks may exceed amounts recognized on the Statement of assets and liabilities. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. The fund and the broker agree to exchange an amount of cash equal to the daily fluctuation in the value of the futures contract. Such receipts or payments are known as “variation margin.”
| International Equity Fund 43 |
Futures contracts outstanding at period end, if any, are listed after the fund’s portfolio.
Forward currency contracts The fund buys and sells forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date. These contracts are used to hedge foreign exchange risk.
The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The fair value of the contract will fluctuate with changes in currency exchange rates. The contract is marked to market daily and the change in fair value is recorded as an unrealized gain or loss. The fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed when the contract matures or by delivery of the currency. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. Risks may exceed amounts recognized on the Statement of assets and liabilities.
Forward currency contracts outstanding at period end, if any, are listed after the fund’s portfolio.
Master agreements The fund is a party to ISDA (International Swaps and Derivatives Association, Inc.) Master Agreements (Master Agreements) with certain counterparties that govern OTC derivative and foreign exchange contracts entered into from time to time. The Master Agreements may contain provisions regarding, among other things, the parties’ general obligations, representations, agreements, collateral requirements, events of default and early termination. With respect to certain counterparties, in accordance with the terms of the Master Agreements, collateral posted to the fund is held in a segregated account by the fund’s custodian and, with respect to those amounts which can be sold or repledged, is presented in the fund’s portfolio. Collateral posted to the fund which cannot be sold or repledged totaled $1,501,584 at the close of the reporting period.
Collateral pledged by the fund is segregated by the fund’s custodian and identified in the fund’s portfolio. Collateral can be in the form of cash or debt securities issued by the U.S. Government or related agencies or other securities as agreed to by the fund and the applicable counterparty. Collateral requirements are determined based on the fund’s net position with each counterparty.
Termination events applicable to the fund may occur upon a decline in the fund’s net assets below a specified threshold over a certain period of time. Termination events applicable to counterparties may occur upon a decline in the counterparty’s long-term and short-term credit ratings below a specified level. In each case, upon occurrence, the other party may elect to terminate early and cause settlement of all derivative and foreign exchange contracts outstanding, including the payment of any losses and costs resulting from such early termination, as reasonably determined by the terminating party. Any decision by one or more of the fund’s counterparties to elect early termination could impact the fund’s future derivative activity.
At the close of the reporting period, the fund had a net liability position of $271,290 on open derivative contracts subject to the Master Agreements. Collateral posted by the fund at period end for these agreements totaled $451,922 and may include amounts related to unsettled agreements.
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 fair value of the securities loaned. The fair value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The remaining maturities of the securities lending transactions are considered overnight and continuous. The risk 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 fund received cash collateral of $18,332,127 and the value of securities loaned amounted to $18,935,777.
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.
Lines of credit The fund participates, along with other Putnam funds, in a $392.5 million syndicated unsecured committed line of credit provided by State Street ($292.5 million) and Northern Trust Company ($100 million)
| 44 International Equity Fund |
and a $235.5 million unsecured uncommitted line of credit 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 higher of (1) the Federal Funds rate and (2) the overnight LIBOR 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 0.04% of the committed line of credit and 0.04% of the uncommitted line of credit has been paid by the participating funds. In addition, a commitment fee of 0.16% 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. 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 Code.
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 June 30, 2016, the fund had a capital loss carryover of $1,215,200,719 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 |
| $19,425,910 | $4,961,870 | $24,387,780 | * |
| 215,742,590 | N/A | 215,742,590 | June 30, 2017 |
| 975,070,349 | N/A | 975,070,349 | June 30, 2018 |
* 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.
Pursuant to federal income tax regulations applicable to regulated investment companies, the fund has elected to defer certain capital losses of $54,117,356 recognized during the period between November 1, 2015 and June 30, 2016 to its fiscal year ending June 30, 2017.
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. These differences include temporary and/or permanent differences from foreign currency gains and losses, from late year loss deferrals, from unrealized gains and losses on certain futures contracts and from partnership income. 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. At the close of the reporting period, the fund reclassified $5,745,469 to increase undistributed net investment income, $343 to decrease paid-in capital and $5,745,126 to increase accumulated net realized loss.
| International Equity Fund 45 |
The tax basis components of distributable earnings and the federal tax cost as of the close of the reporting period were as follows:
| Unrealized appreciation | $80,320,612 |
| Unrealized depreciation | (95,687,566) |
| Net unrealized depreciation | (15,366,954) |
| Undistributed ordinary income | 16,144,762 |
| Capital loss carryforward | (1,215,200,719) |
| Post-October capital loss deferral | (54,117,356) |
| Cost for federal income tax purposes | $936,907,431 |
Note 2: Management fee, administrative services and other transactions
The fund pays Putnam Management a management fee (base 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 all open-end funds sponsored by Putnam Management (excluding net assets of funds that are invested in, or that are invested in by, other Putnam funds to the extent necessary to avoid “double counting” of those assets). Such annual rates may vary as follows:
| 0.850% | of the first $5 billion, | 0.650% | of the next $50 billion, | |
| 0.800% | of the next $5 billion, | 0.630% | of the next $50 billion, | |
| 0.750% | of the next $10 billion, | 0.620% | of the next $100 billion and | |
| 0.700% | of the next $10 billion, | 0.615% | of any excess thereafter. | |
In addition, the monthly management fee consists of the monthly base fee plus or minus a performance adjustment for the month. The performance adjustment is determined based on performance over the thirty-six month period then ended. Each month, the performance adjustment is calculated by multiplying the performance adjustment rate and the fund’s average net assets over the performance period and dividing the result by twelve. The resulting dollar amount is added to, or subtracted from the base fee for that month. The performance adjustment rate is equal to 0.03 multiplied by the difference between the fund’s annualized performance (measured by the fund’s class A shares) and the annualized performance of the MSCI EAFE Index (Net Dividends), each measured over the performance period. The maximum annualized performance adjustment rate is +/– 0.15%. The monthly base fee is determined based on the fund’s average net assets for the month, while the performance adjustment is determined based on the fund’s average net assets over the performance period of up to thirty-six months. This means it is possible that, if the fund underperforms significantly over the performance period, and the fund’s assets have declined significantly over that period, the negative performance adjustment may exceed the base fee. In this event, Putnam Management would make a payment to the fund.
Because the performance adjustment is based on the fund’s performance relative to its applicable benchmark index, and not its absolute performance, the performance adjustment could increase Putnam Management’s fee even if the fund’s shares lose value during the performance period provided that the fund outperformed its benchmark index, and could decrease Putnam Management’s fee even if the fund’s shares increase in value during the performance period provided that the fund underperformed its benchmark index.
For the reporting period, the base fee represented an effective rate (excluding the impact from any expense waivers in effect) of 0.693% of the fund’s average net assets before an increase of $377,046 (0.040% of the fund’s average net assets) based on performance.
Putnam Management has contractually agreed, through October 30, 2017, 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 Management may from time to time voluntarily undertake to waive fees and/or reimburse certain fund expenses. Any such waiver or reimbursement would be voluntary and may be modified or discontinued by Putnam Management at any time without notice. For the reporting period, Putnam Management voluntarily waived $12,233.
| 46 International Equity Fund |
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 Putnam Advisory Company, LLC (PAC), an affiliate of Putnam Management, is authorized by the Trustees to manage a separate portion of the assets of the fund, as designated from time to time by Putnam Management or PIL. PAC did not manage any portion of the assets of the fund during the reporting period. If Putnam Management or PIL were to engage the services of PAC, Putnam Management or PIL, as applicable, would pay a quarterly sub-advisory fee to PAC for its services at the annual rate of 0.35% of the average net assets of the portion of the fund’s assets for which PAC is engaged as sub-adviser.
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. received fees for investor servicing (except for class R5 and R6 shares) that included (1) a per account fee for each direct and underlying non-defined contribution account (“retail account”) of the fund and each of the other funds in its specified category, which was totaled and then allocated to each fund in the category based on its average daily net assets; (2) a specified rate of the fund’s assets attributable to defined contribution plan accounts; and (3) a specified rate based on the average net assets in retail accounts. Putnam Investor Services has agreed that the aggregate investor servicing fees for each fund’s retail and defined contribution accounts will not exceed an annual rate of 0.320% of the fund’s average assets attributable to such accounts. Class R5 shares paid a monthly fee based on the average net assets of class R5 shares at an annual rate of 0.15%. Class R6 shares paid a monthly fee based on the average net assets of class R6 shares at an annual rate of 0.05%. During the reporting period, the expenses for each class of shares related to investor servicing fees were as follows:
| Class A | $1,471,549 | Class R5 | 28,122 | |
| Class B | 24,863 | Class R6 | 18,758 | |
| Class C | 108,146 | Class Y | 191,644 | |
| Class M | 25,847 | Total | $1,875,328 | |
| Class R | 6,399 | |||
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 $1,633 under the expense offset arrangements and by $105,460 under the brokerage/ service arrangements.
Each Independent Trustee of the fund receives an annual Trustee fee, of which $681, 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.
| International Equity Fund 47 |
The fund has adopted distribution plans (the Plans) with respect to its class A, class B, class C, class M and class R shares pursuant to Rule 12b–1 under the Investment Company Act of 1940. The purpose of the Plans 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 Plans provide for payments by the fund to Putnam Retail Management Limited Partnership at an annual rate of up to 0.35%, 1.00%, 1.00%, 1.00% and 1.00% of the average net assets attributable to class A, class B, class C, class M and class R shares, respectively. The Trustees have approved payment by the fund at an annual rate of 0.25%, 1.00%, 1.00%, 0.75% and 0.50% of the average net assets attributable to class A, class B, class C, class M and class R shares, respectively. During the reporting period, the class specific expenses related to distribution fees were as follows:
| Class A | $1,805,738 | Class M | 95,299 | |
| Class B | 122,216 | Class R | 15,735 | |
| Class C | 530,730 | Total | $2,569,718 | |
For the reporting period, Putnam Retail Management Limited Partnership, acting as underwriter, received net commissions of $53,734 and $260 from the sale of class A and class M shares, respectively, and received $6,754 and $1,015 in contingent deferred sales charges from redemptions of class B and class C shares, respectively.
A deferred sales charge of up to 1.00% and 0.65% (no longer applicable effective November 1, 2015) is assessed on certain redemptions of class A and class M shares, respectively. For the reporting period, Putnam Retail Management Limited Partnership, acting as underwriter, received $7 and no monies on class A and class M redemptions, respectively.
Note 3: Purchases and sales of securities
During the reporting period, the cost of purchases and the proceeds from sales, excluding short-term investments, were as follows:
| Cost of purchases | Proceeds from sales | |
| Investments in securities (Long-term) | $722,850,733 | $716,484,217 |
| U.S. government securities (Long-term) | — | — |
| Total | $722,850,733 | $716,484,217 |
The fund may purchase or sell investments from or to other Putnam funds in the ordinary course of business, which can reduce the fund’s transaction costs, at prices determined in accordance with SEC requirements and policies approved by the Trustees. During the reporting period, purchases or sales from or to other Putnam funds, if any, did not represent more than 5% of the fund’s total cost of purchases and/or total proceeds from sales.
Written option transactions during the reporting period are summarized as follows:
| Written option contract | |||
| amounts | Written option premiums | ||
| Written options outstanding at the | |||
| beginning of the reporting period | GBP | — | $— |
| Options opened | GBP | 20,734 | 2,420,984 |
| Options exercised | GBP | — | — |
| Options expired | GBP | — | — |
| Options closed | GBP | — | — |
| Written options outstanding at the end | |||
| of the reporting period | GBP | 20,734 | $2,420,984 |
| 48 International Equity Fund |
Note 4: Capital shares
At the close of the reporting period, there were an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows:
| Year ended 6/30/16 | Year ended 6/30/15 | |||
| Class A | Shares | Amount | Shares | Amount |
| Shares sold | 2,651,425 | $57,907,780 | 3,144,367 | $76,533,839 |
| Shares issued in connection with | ||||
| reinvestment of distributions | 800,781 | 17,761,326 | 298,992 | 6,831,977 |
| 3,452,206 | 75,669,106 | 3,443,359 | 83,365,816 | |
| Shares repurchased | (6,150,371) | (134,954,080) | (5,442,250) | (129,676,737) |
| Net decrease | (2,698,165) | $(59,284,974) | (1,998,891) | $(46,310,921) |
| Year ended 6/30/16 | Year ended 6/30/15 | |||
| Class B | Shares | Amount | Shares | Amount |
| Shares sold | 59,646 | $1,250,723 | 57,299 | $1,313,490 |
| Shares issued in connection with | ||||
| reinvestment of distributions | 10,449 | 221,516 | 355 | 7,752 |
| 70,095 | 1,472,239 | 57,654 | 1,321,242 | |
| Shares repurchased | (191,835) | (4,012,467) | (255,263) | (5,790,744) |
| Net decrease | (121,740) | $(2,540,228) | (197,609) | $(4,469,502) |
| Year ended 6/30/16 | Year ended 6/30/15 | |||
| Class C | Shares | Amount | Shares | Amount |
| Shares sold | 244,047 | $5,272,298 | 318,500 | $7,457,465 |
| Shares issued in connection with | ||||
| reinvestment of distributions | 42,774 | 918,790 | 3,856 | 85,407 |
| 286,821 | 6,191,088 | 322,356 | 7,542,872 | |
| Shares repurchased | (432,908) | (9,129,863) | (313,935) | (7,215,631) |
| Net increase (decrease) | (146,087) | $(2,938,775) | 8,421 | $327,241 |
| Year ended 6/30/16 | Year ended 6/30/15 | |||
| Class M | Shares | Amount | Shares | Amount |
| Shares sold | 47,639 | $1,007,032 | 36,738 | $856,025 |
| Shares issued in connection with | ||||
| reinvestment of distributions | 12,214 | 264,196 | 2,660 | 59,295 |
| 59,853 | 1,271,228 | 39,398 | 915,320 | |
| Shares repurchased | (183,476) | (3,866,958) | (143,247) | (3,289,406) |
| Net decrease | (123,623) | $(2,595,730) | (103,849) | $(2,374,086) |
| Year ended 6/30/16 | Year ended 6/30/15 | |||
| Class R | Shares | Amount | Shares | Amount |
| Shares sold | 90,513 | $1,939,045 | 98,719 | $2,306,677 |
| Shares issued in connection with | ||||
| reinvestment of distributions | 2,413 | 52,670 | 1,225 | 27,522 |
| 92,926 | 1,991,715 | 99,944 | 2,334,199 | |
| Shares repurchased | (132,510) | (2,915,045) | (53,033) | (1,237,049) |
| Net increase (decrease) | (39,584) | $(923,330) | 46,911 | $1,097,150 |
| International Equity Fund 49 |
| Year ended 6/30/16 | Year ended 6/30/15 | |||
| Class R5 | Shares | Amount | Shares | Amount |
| Shares sold | 119,790 | $2,709,241 | 534,388 | $12,310,957 |
| Shares issued in connection with | ||||
| reinvestment of distributions | 25,259 | 567,566 | 4,188 | 96,950 |
| 145,049 | 3,276,807 | 538,576 | 12,407,907 | |
| Shares repurchased | (172,318) | (3,762,860) | (42,729) | (1,040,659) |
| Net increase (decrease) | (27,269) | $(486,053) | 495,847 | $11,367,248 |
| Year ended 6/30/16 | Year ended 6/30/15 | |||
| Class R6 | Shares | Amount | Shares | Amount |
| Shares sold | 3,188,189 | $67,364,866 | 105,358 | $2,562,894 |
| Shares issued in connection with | ||||
| reinvestment of distributions | 24,608 | 553,438 | 9,363 | 216,948 |
| 3,212,797 | 67,918,304 | 114,721 | 2,779,842 | |
| Shares repurchased | (742,835) | (15,441,184) | (98,313) | (2,359,309) |
| Net increase | 2,469,962 | $52,477,120 | 16,408 | $420,533 |
| Year ended 6/30/16 | Year ended 6/30/15 | |||
| Class Y | Shares | Amount | Shares | Amount |
| Shares sold | 2,910,094 | $65,077,533 | 2,082,573 | $51,519,832 |
| Shares issued in connection with | ||||
| reinvestment of distributions | 116,649 | 2,615,264 | 33,603 | 776,571 |
| 3,026,743 | 67,692,797 | 2,116,176 | 52,296,403 | |
| Shares repurchased | (2,277,789) | (50,122,982) | (855,148) | (20,313,250) |
| Net increase | 748,954 | $17,569,815 | 1,261,028 | $31,983,153 |
At the close of the reporting period, Putnam Investments, LLC owned the following shares of the fund:
| Shares owned | Percentage of ownership | Value | |
| Class R5 | 623 | 0.1% | $12,952 |
Note 5: Affiliated transactions
Transactions during the reporting period with Putnam Short Term Investment Fund, which is under common ownership and control, were as follows:
| Fair value at the | Fair value at | ||||
| beginning of | the end of | ||||
| the reporting | Investment | the reporting | |||
| Name of affiliate | period | Purchase cost | Sale proceeds | income | period |
| Putnam Short Term | |||||
| Investment Fund* | $41,184,807 | $348,140,448 | $351,505,058 | $49,004 | $37,820,197 |
| Totals | $41,184,807 | $348,140,448 | $351,505,058 | $49,004 | $37,820,197 |
* Management fees charged to Putnam Short Term Investment Fund have been waived by Putnam Management.
| 50 International Equity Fund |
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.
Note 7: Summary of derivative activity
The volume of activity for the reporting period for any derivative type that was held during the period is listed below and was based on an average of the holdings at the end of each fiscal quarter:
| Purchased equity option contracts (contract amount) | $6,000 |
| Written equity option contracts (contract amount) (Note 3) | $6,000 |
| Futures contracts (number of contracts) | 30 |
| Forward currency contracts (contract amount) | $366,100,000 |
Fair value of derivative instruments as of the close of the reporting period
| Asset derivatives | Liability derivatives | |||
| Derivatives not | ||||
| accounted for as | Statement of | Statement of | ||
| hedging instruments | assets and | assets and | ||
| under ASC 815 | liabilities location | Fair value | liabilities location | Fair value |
| Foreign exchange | ||||
| contracts | Receivables | $6,110,390 | Payables | $1,273,848 |
| Investments, | ||||
| Receivables, Net | ||||
| assets — Unrealized | ||||
| Equity contracts | appreciation | 671,430* | Payables | 74,448 |
| Total | $6,781,820 | $1,348,296 | ||
* Includes cumulative appreciation/depreciation of futures contracts as reported in the fund’s portfolio. Only current day’s variation margin is reported within the Statement of assets and liabilities.
The following is a summary of realized and change in unrealized gains or losses of derivative instruments in the Statement of operations for the reporting period (see Note 1):
Amount of realized gain or (loss) on derivatives recognized in net gain or (loss) on investments
| Derivatives not accounted for as hedging | Forward currency | ||
| instruments under ASC 815 | Futures | contracts | Total |
| Foreign exchange contracts | $— | $6,265,502 | $6,265,502 |
| Equity contracts | (735,797) | — | $(735,797) |
| Total | $(735,797) | $6,265,502 | $5,529,705 |
Change in unrealized appreciation or (depreciation) on derivatives recognized in net gain or (loss) on investments
| Derivatives not accounted for | Forward | |||
| as hedging instruments under | currency | |||
| ASC 815 | Options | Futures | contracts | Total |
| Foreign exchange contracts | $— | $— | $3,285,220 | $3,285,220 |
| Equity contracts | (787,179) | 540,721 | — | $(246,458) |
| Total | $(787,179) | $540,721 | $3,285,220 | $3,038,762 |
| International Equity Fund 51 |
Note 8: Offsetting of financial and derivative assets and liabilities
The following table summarizes any derivatives, repurchase agreements and reverse repurchase agreements, at the end of the reporting period, that are subject to an enforceable master netting agreement or similar agreement. For securities lending transactions or borrowing transactions associated with securities sold short, if any, see Note 1. For financial reporting purposes, the fund does not offset financial assets and financial liabilities that are subject to the master netting agreements in the Statement of assets and liabilities.
| Bank of America N.A. | Barclays Bank PLC | Citibank, N. A. | Credit Suisse International | Goldman Sachs International | HSBC Bank USA, National Association | JPMorgan Chase Bank N.A. | Merrill Lynch, Pierce, Fenner & Smith, Inc. | State Street Bank and Trust Co. | UBS AG | Total | |
| Assets: | |||||||||||
| Futures contracts§ | $— | $— | $— | $— | $— | $— | $— | $180,812 | $— | $— | $180,812 |
| Forward currency contracts# | 38,489 | 395,412 | 183,070 | 1,684,616 | 616,847 | 1,004,885 | 586,912 | — | 714,524 | 885,635 | 6,110,390 |
| Purchased options**# | — | — | 130,709 | — | — | — | — | — | — | — | 130,709 |
| Total Assets | $38,489 | $395,412 | $313,779 | $1,684,616 | $616,847 | $1,004,885 | $586,912 | $180,812 | $714,524 | $885,635 | $6,421,911 |
| Liabilities: | |||||||||||
| Futures contracts§ | — | — | — | — | — | — | — | — | — | — | — |
| Forward currency contracts# | 182,934 | 6,356 | 366,176 | 400,878 | — | — | 270,036 | — | 42,278 | 5,190 | 1,273,848 |
| Written options# | — | — | 74,448 | — | — | — | — | — | — | — | 74,448 |
| Total Liabilities | $182,934 | $6,356 | $440,624 | $400,878 | $— | $— | $270,036 | $— | $42,278 | $5,190 | $1,348,296 |
| Total Financial and Derivative Net Assets | $(144,445) | $389,056 | $(126,845) | $1,283,738 | $616,847 | $1,004,885 | $316,876 | $180,812 | $672,246 | $880,445 | $5,073,615 |
| Total collateral received (pledged)†## | $(144,445) | $389,056 | $(119,988) | $1,280,000 | $616,847 | $1,004,885 | $316,876 | $— | $672,246 | $867,113 | |
| Net amount | $— | $— | $(6,857) | $3,738 | $— | $— | $— | $180,812 | $— | $13,332 | |
** Included with Investments in securities on the Statement of assets and liabilities.
† Additional collateral may be required from certain brokers based on individual agreements.
# Covered by master netting agreement (Note 1).
## Any over-collateralization of total financial and derivative net assets is not shown. Collateral may include amounts related to unsettled agreements.
§ Includes current day’s variation margin only as reported on the Statement of assets and liabilities, which is not collateralized. Cumulative appreciation/(depreciation) for futures contracts and centrally cleared swap contracts is represented in the tables listed after the fund’s portfolio.
| 52 International Equity Fund | International Equity Fund 53 |
Federal tax information (Unaudited)
For the reporting period, total interest and dividend income from foreign countries were $27,525,429, or $0.63 per share (for all classes of shares). Taxes paid to foreign countries were $2,458,684, or $0.06 per share (for all classes of shares).
For the reporting period, the fund hereby designates 100%, or the maximum amount allowable, of its taxable ordinary income distributions as qualified dividends taxed at the individual net capital gain rates.
For the reporting period, pursuant to §871(k) of the Internal Revenue Code, the fund hereby designates $9,915 of distributions paid as qualifying to be taxed as interest-related dividends, and no monies to be taxed as short-term capital gain dividends for nonresident alien shareholders.
The Form 1099 that will be mailed to you in January 2017 will show the tax status of all distributions paid to your account in calendar 2016.
| 54 International Equity Fund |
About the Trustees
Independent Trustees
| International Equity Fund 55 |
* Mr. Reynolds is an “interested person” (as defined in the Investment Company Act of 1940) of the fund and Putnam Investments. He is President and Chief Executive Officer of Putnam Investments, as well as the President of your fund and each of the other Putnam funds.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of June 30, 2016, there were 117 Putnam funds. All Trustees serve as Trustees of all Putnam funds.
Each Trustee serves for an indefinite term, until his or her resignation, retirement at age 75, removal, or death.
| 56 International Equity Fund |
Officers
In addition to Robert L. Reynolds, the other officers of the fund are shown below:
| Jonathan S. Horwitz (Born 1955) | Janet C. Smith (Born 1965) |
| Executive Vice President, Principal Executive | Vice President, Principal Accounting Officer, |
| Officer, and Compliance Liaison | and Assistant Treasurer |
| Since 2004 | Since 2007 |
| Director of Fund Administration Services, | |
| Steven D. Krichmar (Born 1958) | Putnam Investments and Putnam Management |
| Vice President and Principal Financial Officer | |
| Since 2002 | Susan G. Malloy (Born 1957) |
| Chief of Operations, Putnam Investments and | Vice President and Assistant Treasurer |
| Putnam Management | Since 2007 |
| Director of Accounting & Control Services, | |
| Robert T. Burns (Born 1961) | Putnam Investments and Putnam Management |
| Vice President and Chief Legal Officer | |
| Since 2011 | James P. Pappas (Born 1953) |
| General Counsel, Putnam Investments, Putnam | Vice President |
| Management, and Putnam Retail Management | Since 2004 |
| Director of Trustee Relations, | |
| James F. Clark (Born 1974) | Putnam Investments and Putnam Management |
| Vice President and Chief Compliance Officer | |
| Since 2016 | Mark C. Trenchard (Born 1962) |
| Chief Compliance Officer, Putnam Investments | Vice President and BSA Compliance Officer |
| and Putnam Management | Since 2002 |
| Director of Operational Compliance, | |
| Michael J. Higgins (Born 1976) | Putnam Investments and Putnam |
| Vice President, Treasurer, and Clerk | Retail Management |
| Since 2010 | |
| Manager of Finance, Dunkin’ Brands (2008– | Nancy E. Florek (Born 1957) |
| 2010); Senior Financial Analyst, Old Mutual Asset | Vice President, Director of Proxy Voting |
| Management (2007–2008); Senior Financial | and Corporate Governance, Assistant Clerk, |
| Analyst, Putnam Investments (1999–2007) | and Associate Treasurer |
| Since 2000 |
The principal occupations of the officers for the past five years have been with the employers as shown above, although in some cases they have held different positions with such employers. The address of each officer is One Post Office Square, Boston, MA 02109.
| International Equity Fund 57 |
Putnam family of funds
The following is a list of Putnam’s open-end mutual funds offered to the public. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, contact your financial advisor or call Putnam Investor Services at 1-800-225-1581. Please read the prospectus carefully before investing.
| Growth | International Value Fund |
| Growth Opportunities Fund | Multi-Cap Value Fund |
| International Growth Fund | Small Cap Value Fund |
| Multi-Cap Growth Fund | |
| Small Cap Growth Fund | Income |
| Voyager Fund | American Government Income Fund |
| Diversified Income Trust | |
| Blend | Emerging Markets Income Fund |
| Asia Pacific Equity Fund | Floating Rate Income Fund |
| Capital Opportunities Fund | Global Income Trust |
| Capital Spectrum Fund | Government Money Market Fund* |
| Emerging Markets Equity Fund | High Yield Advantage Fund |
| Equity Spectrum Fund | High Yield Trust |
| Europe Equity Fund | Income Fund |
| Global Equity Fund | Money Market Fund* |
| International Capital Opportunities Fund | Short Duration Income Fund |
| International Equity Fund | U.S. Government Income Trust |
| Investors Fund | |
| Low Volatility Equity Fund | Tax-free Income |
| Multi-Cap Core Fund | AMT-Free Municipal Fund |
| Research Fund | Intermediate-Term Municipal Income Fund |
| Strategic Volatility Equity Fund | Short-Term Municipal Income Fund |
| Tax Exempt Income Fund | |
| Value | Tax-Free High Yield Fund |
| Convertible Securities Fund | |
| Equity Income Fund | State tax-free income funds†: |
| Global Dividend Fund | Arizona, California, Massachusetts, Michigan, |
| The Putnam Fund for Growth and Income | Minnesota, New Jersey, New York, Ohio, |
| and Pennsylvania. |
| 58 International Equity Fund |
| Absolute Return | Retirement Income Lifestyle Funds — |
| Absolute Return 100 Fund® | portfolios with managed allocations to |
| Absolute Return 300 Fund® | stocks, bonds, and money market |
| Absolute Return 500 Fund® | investments to generate retirement income. |
| Absolute Return 700 Fund® | |
| Retirement Income Fund Lifestyle 1 | |
| Global Sector | Retirement Income Fund Lifestyle 2 |
| Global Consumer Fund | Retirement Income Fund Lifestyle 3 |
| Global Energy Fund | |
| Global Financials Fund | RetirementReady® Funds — portfolios with |
| Global Health Care Fund | adjusting allocations to stocks, bonds, and |
| Global Industrials Fund | money market instruments, becoming more |
| Global Natural Resources Fund | conservative over time. |
| Global Sector Fund | |
| Global Technology Fund | RetirementReady® 2060 Fund |
| Global Telecommunications Fund | RetirementReady® 2055 Fund |
| Global Utilities Fund | RetirementReady® 2050 Fund |
| RetirementReady® 2045 Fund | |
| Asset Allocation | RetirementReady® 2040 Fund |
| George Putnam Balanced Fund | RetirementReady® 2035 Fund |
| RetirementReady® 2030 Fund | |
| Global Asset Allocation Funds — four | RetirementReady® 2025 Fund |
| investment portfolios that spread your | RetirementReady® 2020 Fund |
| money across a variety of stocks, bonds, and | |
| money market instruments. | |
| Dynamic Asset Allocation Balanced Fund | |
| Dynamic Asset Allocation Conservative Fund | |
| Dynamic Asset Allocation Growth Fund | |
| Dynamic Risk Allocation Fund |
* 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 fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
† Not available in all states.
Check your account balances and the most recent month-end performance in the Individual Investors section at putnam.com.
| International Equity Fund 59 |
Services for shareholders
Investor services
Systematic investment plan Tell us how much you wish to invest regularly — weekly, semimonthly, or monthly — and the amount you choose will be transferred automatically from your checking or savings account. There’s no additional fee for this service, and you can suspend it at any time. This plan may be a great way to save for college expenses or to plan for your retirement.
Please note that regular investing does not guarantee a profit or protect against loss in a declining market. Before arranging a systematic investment plan, consider your financial ability to continue making purchases in periods when prices are low.
Systematic exchange You can make regular transfers from one Putnam fund to another Putnam fund. There are no additional fees for this service, and you can cancel or change your options at any time.
Dividends PLUS You can choose to have the dividend distributions from one of your Putnam funds automatically reinvested in another Putnam fund at no additional charge.
Free exchange privilege You can exchange money between Putnam funds free of charge, as long as they are the same class of shares. A signature guarantee is required if you are exchanging more than $500,000. The fund reserves the right to revise or terminate the exchange privilege.
Reinstatement privilege If you’ve sold Putnam shares or received a check for a dividend or capital gain, you may reinvest the proceeds with Putnam within 90 days of the transaction and they will be reinvested at the fund’s current net asset value — with no sales charge. However, reinstatement of class B shares may have special tax consequences. Ask your financial or tax representative for details.
Check-writing service You have ready access to many Putnam accounts. It’s as simple as writing a check, and there are no special fees or service charges. For more information about the check-writing service, call Putnam or visit our website.
Dollar cost averaging When you’re investing for long-term goals, it’s time, not timing, that counts. Investing on a systematic basis is a better strategy than trying to figure out when the markets will go up or down. This means investing the same amount of money regularly over a long period. This method of investing is called dollar cost averaging. When a fund’s share price declines, your investment dollars buy more shares at lower prices. When it increases, they buy fewer shares. Over time, you will pay a lower average price per share.
For more information
Visit the Individual Investors section at putnam.com A secure section of our website contains complete information on your account, including balances and transactions, updated daily. You may also conduct transactions, such as exchanges, additional investments, and address changes. Log on today to get your password.
Call us toll free at 1-800-225-1581 Ask a helpful Putnam representative or your financial advisor for details about any of these or other services, or see your prospectus.
| 60 International Equity Fund |
Fund information
Founded over 75 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We manage over 100 funds across income, value, blend, growth, asset allocation, absolute return, and global sector categories.
| Investment Manager | Trustees | James F. Clark |
| Putnam Investment | Jameson A. Baxter, Chair | Vice President and |
| Management, LLC | Liaquat Ahamed | Chief Compliance Officer |
| One Post Office Square | Ravi Akhoury | |
| Boston, MA 02109 | Barbara M. Baumann | Michael J. Higgins |
| Robert J. Darretta | Vice President, Treasurer, | |
| Investment Sub-Advisors | Katinka Domotorffy | and Clerk |
| Putnam Investments Limited | John A. Hill | |
| 57–59 St James’s Street | Paul L. Joskow | Janet C. Smith |
| London, England SW1A 1LD | Kenneth R. Leibler | Vice President, |
| The Putnam Advisory | Robert E. Patterson | Principal Accounting Officer, |
| Company, LLC | George Putnam, III | and Assistant Treasurer |
| One Post Office Square | Robert L. Reynolds | |
| Boston, MA 02109 | W. Thomas Stephens | Susan G. Malloy |
| Vice President and | ||
| Marketing Services | Officers | Assistant Treasurer |
| Putnam Retail Management | Robert L. Reynolds | |
| One Post Office Square | President | James P. Pappas |
| Boston, MA 02109 | Vice President | |
| Jonathan S. Horwitz | ||
| Custodian | Executive Vice President, | Mark C. Trenchard |
| State Street Bank | Principal Executive Officer, and | Vice President and |
| and Trust Company | Compliance Liaison | BSA Compliance Officer |
| Legal Counsel | Steven D. Krichmar | Nancy E. Florek |
| Ropes & Gray LLP | Vice President and | Vice President, Director of |
| Principal Financial Officer | Proxy Voting and Corporate | |
| Independent Registered | Governance, Assistant Clerk, | |
| Public Accounting Firm | Robert T. Burns | and Associate Treasurer |
| PricewaterhouseCoopers LLP | Vice President and | |
| Chief Legal Officer |
This report is for the information of shareholders of Putnam International Equity Fund. It may also be used as sales literature when preceded or accompanied by the current prospectus, the most recent copy of Putnam’s Quarterly Performance Summary, and Putnam’s Quarterly Ranking Summary. For more recent performance, please visit putnam.com. Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund, which are described in its prospectus. For this and other information or to request a prospectus or summary prospectus, call 1-800-225-1581 toll free. Please read the prospectus carefully before investing. 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.
| Item 2. Code of Ethics: |
| (a) The fund's principal executive, financial and accounting officers are employees of Putnam Investment Management, LLC, the Fund's investment manager. As such they are subject to a comprehensive Code of Ethics adopted and administered by Putnam Investments which is designed to protect the interests of the firm and its clients. The Fund has adopted a Code of Ethics which incorporates the Code of Ethics of Putnam Investments with respect to all of its officers and Trustees who are employees of Putnam Investment Management, LLC. For this reason, the Fund has not adopted a separate code of ethics governing its principal executive, financial and accounting officers. |
| (c) In November 2015, the Code of Ethics of Putnam Investment Management, LLC was amended. The key changes to the Code of Ethics are as follows: (i) Non-Access Persons are no longer required to pre-clear their trades, (ii) a new provision governing conflicts of interest has been added, (iii) modifying certain provisions of the pre-clearance requirements, Contra-Trading Rule and 60-Day Short-Term Rule, (iv) modifying and adding language relating to reporting of unethical or illegal acts, including anti-retaliation provision, and (v) certain other changes. |
| Item 3. Audit Committee Financial Expert: |
| The Funds' Audit, Compliance and Distributions Committee is comprised solely of Trustees who are "independent" (as such term has been defined by the Securities and Exchange Commission ("SEC") in regulations implementing Section 407 of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe that each of the members of the Audit, Compliance and Distributions Committee also possess a combination of knowledge and experience with respect to financial accounting matters, as well as other attributes, that qualify them for service on the Committee. In addition, the Trustees have determined that each of Mr. Darretta, Mr. Patterson, Mr. Hill, and Ms. Baumann qualifies as an "audit committee financial expert" (as such term has been defined by the Regulations) based on their review of his or her pertinent experience and education. The SEC has stated, and the funds' amended and restated agreement and Declaration of Trust provides, that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit, Compliance and Distribution Committee and the Board of Trustees in the absence of such designation or identification. |
| Item 4. Principal Accountant Fees and Services: |
| The following table presents fees billed in each of the last two fiscal years for services rendered to the fund by the fund's independent auditor: |
| Fiscal year ended | Audit Fees | Audit-Related Fees | Tax Fees | All Other Fees | |
| June 30, 2016 | $84,373 | $— | $13,108 | $— | |
| June 30, 2015 | $88,971 | $— | $16,594 | $— | |
| For the fiscal years ended June 30, 2016 and June 30, 2015, the fund's independent auditor billed aggregate non-audit fees in the amounts of $643,544 and $617,739 respectively, to the fund, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund. |
| Audit Fees represent fees billed for the fund's last two fiscal years relating to the audit and review of the financial statements included in annual reports and registration statements, and other services that are normally provided in connection with statutory and regulatory filings or engagements. |
| Audit-Related Fees represent fees billed in the fund's last two fiscal years for services traditionally performed by the fund's auditor, including accounting consultation for proposed transactions or concerning financial accounting and reporting standards and other audit or attest services not required by statute or regulation. |
| Tax Fees represent fees billed in the fund's last two fiscal years for tax compliance, tax planning and tax advice services. Tax planning and tax advice services include assistance with tax audits, employee benefit plans and requests for rulings or technical advice from taxing authorities. |
| Pre-Approval Policies of the Audit, Compliance and Distributions Committee. The Audit, Compliance and Distributions Committee of the Putnam funds has determined that, as a matter of policy, all work performed for the funds by the funds' independent auditors will be pre-approved by the Committee itself and thus will generally not be subject to pre-approval procedures. |
| The Audit, Compliance and Distributions Committee also has adopted a policy to pre-approve the engagement by Putnam Management and certain of its affiliates of the funds' independent auditors, even in circumstances where pre-approval is not required by applicable law. Any such requests by Putnam Management or certain of its affiliates are typically submitted in writing to the Committee and explain, among other things, the nature of the proposed engagement, the estimated fees, and why this work should be performed by that particular audit firm as opposed to another one. In reviewing such requests, the Committee considers, among other things, whether the provision of such services by the audit firm are compatible with the independence of the audit firm. |
| The following table presents fees billed by the fund's independent auditor for services required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X. |
| Fiscal year ended | Audit-Related Fees | Tax Fees | All Other Fees | Total Non-Audit Fees | |
| June 30, 2016 | $— | $630,436 | $— | $— | |
| June 30, 2015 | $— | $601,145 | $— | $— | |
| Item 5. Audit Committee of Listed Registrants |
| Not applicable |
| Item 6. Schedule of Investments: |
| The registrant's schedule of investments in unaffiliated issuers is included in the report to shareholders in Item 1 above. |
| Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End Management Investment Companies: |
| Not applicable |
| Item 8. Portfolio Managers of Closed-End Investment Companies |
| Not Applicable |
| Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers: |
| Not applicable |
| Item 10. Submission of Matters to a Vote of Security Holders: |
| Not applicable |
| 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 |
| Item 12. Exhibits: |
| (a)(1) The Code of Ethics of The Putnam Funds, which incorporates the Code of Ethics of Putnam Investments, is filed herewith. |
| (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. |
| SIGNATURES |
| Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
| Putnam International Equity Fund |
| By (Signature and Title): |
| /s/ Janet C. Smith Janet C. Smith Principal Accounting Officer |
| Date: August 26, 2016 |
| 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 |
| Date: August 26, 2016 |
| By (Signature and Title): |
| /s/ Steven D. Krichmar Steven D. Krichmar Principal Financial Officer |
| Date: August 26, 2016 |