Q3 | 2012Putnam Research Fund Q&A

Encouraging fundamentals point the way forward for U.S. equities

Aaron M. Cooper, CFA Portfolio Manager

Portfolio management team

Aaron Cooper leads a team of veteran investors responsible for day-to-day management of the funds.

Key takeaways U.S. markets performed well relative to global markets in the third quarter, with sectors such as U.S. housing providing a strong tailwind for domestic equities. As macroeconomic headwinds gave way to fundamentally driven market performance, active stock selection reasserted its value for investors. U.S. stocks have a good foundation of fundamentals and valuation-based factors to help them realize further positive potential.

Kelsey Chen, Ph.D. (industry since 1999)

Ferat Ongoren (industry since 1997)

Could you describe the market backdrop in the third quarter? Markets had a positive quarter, with U.S. stocks generally outperforming non-U.S. stocks. Concerns over global economic growth did not dissipate, but investors found reasons to cheer policy in Europe and the United States, while slowing growth in China caused fresh bouts of uncertainty for emerging markets, commodities, and developed market stocks leveraged to Chinas growth. In the United States, optimism was buoyed by hopeful economic signs in sectors like housing. Do you expect developments in U.S. housing will continue to lend support to markets? U.S. housing was an important theme as the sector moved from stabilization to recovery, and we believe it will continue to serve as a rallying point for investors in the months ahead. Inventory levels remain depressed, affordability levels are exceptionally attractive, and buyers appear to be getting off the fence. This has helped housing sales data to improve, and prices have begun to rebound off depressed levels. Many companies directly or indirectly tied to U.S. housing have experienced fundamental improvements, while optimism in housing holds important implications for broad investor sentiment.

Steven W. Curbow (industry since 1996)

Walter D. Scully, CPA (industry since 1990)

Neil P. Desai (industry since 1997) Not shown

PUTNAM INVESTM ENTS| putnam.com

Q32012| Encouraging fundamentals point the way forward for U.S. equities

How does Putnams research team manage volatility? Despite the markets recent rise, the uncertain global economic backdrop is still very much with us, and that means volatility could spike or stay elevated for some time to come. In this type of environment, we actively seek to invest in companies that we think will grow substantially regardless of the volatility regime we are moving through over the next several years. Putnams global equity research group works hard to find these opportunities, and, where our conviction is highest, we establish large exposures so that we can maximally benefit from these companies upside potential. Our general view is that stocks follow earnings. Therefore, if we are correct in our understanding of the earnings outlook, we believe we can be that much more accurate and timely in our stock selection. At the same time, we believe there are certain types of businesses that are higher quality and better able to withstand difficult market and economic conditions. These include companies with high recurring revenue streams, which means they dont have to reproduce the same business every year; companies that have a strong ability to convert earnings into free cash flow, which helps them reinvest in their businesses; and companies with significant excess cash balances that they can use to fund acquisitions at a discount, in many cases, because of todays still challenging economic environment. Could you talk about your efforts to build out Putnams research team since you arrived at the firm in July 2011? Weve been able to add a number of talented analysts to our ranks over the past year, including analysts at strong firms who sought to join our team. We feel we have one of the best research teams, which is characterized by out-of-the-box critical thinking and active debate in a collaborative environment. Whats more, we empower analysts to look across a broad universe of stocks for the most attractive opportunities, and we encourage analysts to focus on those stocks that they believe will move and matter the most.

Putnam recently added additional investment research staff in the Singapore office. What do these moves say about the importance of the region? We have deepened our presence abroad, and now have five analysts in our Singapore office. We think it is important to have a robust presence on the ground in Asia because it gives us a better chance to identify the most attractive opportunities in a number of fast-growing areas in the global economy. How did Putnam Research Fund perform in the third quarter? The fund outpaced its benchmark, the S&P 500 Index, in the third quarter. We attribute this result to our riskaware approach to stock selection, investors growing comfort with riskier assets like stocks, and the fact that markets began rewarding companies with strong fundamentals. While not every position will perform well across every market environment, we are encouraged by the funds results and current positioning, which reflects our analysts best ideas across sectors based on painstaking fundamental research. How is the fund structured? Putnam Research Fund takes a sector-neutral approach, which means we invest in all the sectors represented in the S&P 500 Index and to the same degree that each sector represents a particular benchmark weight. Typically, this means that each analyst is charged with outperforming a given sector by gaining exposure to 5 to 15 stocks that he or she expects will outperform relative to their peers. In other words, we seek to generate the best possible performance by picking the most attractive opportunities within each sector.

PUTNAM INVESTM ENTS| putnam.com

What is your outlook for equity markets and the fund over the next few months? We expect there will be continued economic turbulence and market volatility in some areas of the developed world, notably Europe. We expect the European Central Bank (ECB) and national governments will continue to negotiate their way through providing support on the one hand, and putting pressure on weaker European economies to institute fiscal reforms on the other. It appears likely to us that the ECBs measures will buy time and lessen the risk of an economic meltdown in the near term. We have high conviction in the value of focusing on the fundamental picture of U.S. corporate health, which appears to be strong despite the dampening effect of European weakness on business activity. On balance, fundamentals improved in the third quarter, and our research suggests that trend may continue through year-end. Combined with still-attractive valuations, we see stocks as having a fairly healthy backdrop for extending their latest rally.

Putnam Research Fund (PNRAX)

Annualized total return performance as of September 30, 2012 Class A shares (inception 10/2/95)
Last quarter 1 year 3 years 5 years 10 years Life of fund

Before sales charge

6.82% 30.82 12.21 0.66 6.72 7.01

After sales charge

0.70% 23.31 10.02 -0.53 6.10 6.63

S&P 500 Index

6.35% 30.20 13.20 1.05 8.01 7.43

Total expense ratio: 1.23%

Quarterly returns are cumulative. Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. Performance of class A shares before sales charge assumes reinvestment of distributions and does not account for taxes. After-sales-charge returns reflect a maximum 5.75% load. A short-term trading fee of 1% may apply to redemptions or exchanges from certain funds within the time period specified in the funds prospectus. The funds expense ratio is taken from the most recent prospectus and is subject to change. To obtain the most recent month-end performance, visit putnam.com. Recent performance may have benefited from one or more legal settlements. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.

Q32012| Encouraging fundamentals point the way forward for U.S. equities

The views and opinions expressed are those of Aaron M. Cooper, CFA, Portfolio Manager, as of September 30, 2012. They are subject to change with market conditions and are not meant as investment advice. Consider these risks before investing: Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. Request a prospectus or summary prospectus from your financial representative or by calling 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
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