Q3 | 2012Putnam Equity Income Fund Q&A

At the close of a strong quarter, compelling opportunities remain for value investors
Darren A. Jaroch, CFA Portfolio Manager

Portfolio management team

Darren Jaroch leads a team of veteran investors responsible for day-to-day management of the fund.

Key takeaways The funds new manager brings significant value and yield investing experience to the role. This is a compelling time to be a value investor, as the spread in valuation has broadened considerably. Almost all sectors today including those with rapid growth potential offer attractive yield opportunities.

Walter D. Scully, CPA Assistant Portfolio Manager (industry since 1990)

You recently became manager of Putnam Equity Income Fund, and you bring 16 years of investment industry experience to the role. What is your investing background? Early in my Putnam career, I worked with the value teams to develop quantitative models, and in 2000, I joined Putnams domestic Large Cap Value team. Over time, I have contributed to the investment process for all of Putnams value portfolios. In 2005, I was named to the management team of Putnam International Value Fund, and today I manage that fund as well domestic, international, and global value portfolios for institutional clients. Can you describe your philosophy and approach to managing Putnam Equity Income Fund? I share the investment approach that has been the cornerstone of the fund since its inception seeking a combination of growth and income potential for investors, striving for positive returns over a full investment cycle, and employing disciplined risk management. I seek to maintain a diversified portfolio, focusing on fundamental research of individual stocks, and avoiding significant overweights of a single security or sector. In building the portfolio, I look for high cash-flow generating businesses with the willingness and ability to return cash to shareholders when appropriate.

PUTNAM INVESTM ENTS| putnam.com

Q32012| At the close of a strong quarter, compelling opportunities remain for value investors

Youve spent much of your career focusing on international and global equities. How significant is the transition to managing a domestic portfolio? Most professional investors would agree that global expertise is imperative, regardless of whether you are managing a global, international, or U.S.-mandated product. I am fortunate to have years of global investing experience to bring to my role in managing this fund, since virtually every U.S. large-cap company has an international component to its business. For many of these companies, that overseas business is far larger than its U.S. business. In building an equity portfolio of any type, when you look at the competitive dynamics that have emerged in the global marketplace, it is limiting to have a U.S.-only focus. There are clearly some sectors that are more regionally focused, such as utilities and some health care, but for the vast majority of equities particularly among the largest U.S. companies the analysis must include a distinct understanding of global markets. Turning to the third quarter, can you tell us about the investing environment for value stocks? Overall, equities delivered solid performance, but it was a tale of two quarters for value stocks, which underperformed in the early part of the rally, then finished so strongly that they outperformed growth for the quarter as a whole. From a broad style perspective, growth equities have outperformed value for several years. However, its worth noting that the spread in valuation that is, the difference between the most expensive and least expensive equities has broadened considerably. In my view, this is a compelling time to be a value investor, as a vast opportunity set has been laid out for us. In terms of sectors, we saw many cyclicals rebound in the quarter. Energy was among the strongest performers, followed closely by consumer discretionary stocks. The laggards consisted mainly of high-dividend-paying companies, with staples and utilities struggling most. The market delivered a notable bifurcation between cyclical and defensive sectors for the quarter.

The number of dividend-paying companies recently rose to its highest level since 1999. Has this created opportunities for the fund? If you go back 10 years and look at the landscape for dividend-paying stocks, you will find that investors were pigeonholed into a few sectors: electric utilities, telecommunications, and some large-cap health-care companies, for example. In recent years, there has been quite a shift in terms of investor focus and corporate focus in favor of dividends. The payment of a dividend is no longer perceived as a sign that a business has weaker growth prospects, and we are seeing much greater diversity among dividend payers. While the classic yield sectors are still paying the highest dividends, almost all sectors today including those with rapid growth potential offer attractive yield opportunities. As we enter the final quarter of 2012, what is your outlook? I believe equity markets will continue to experience volatility in the closing months of the year. We have seen a continual exchange of risk-on and risk-off sentiment, and in this most recent risk-on period, cyclical sectors have rebounded. However, from a longer-term perspective over the next 6 or 12 months I am more bullish on defensive sectors, and I believe these stocks, particularly the higher-yielding names, will be the better performers. They have been a favorite of the market for some time now, and valuations from a historical context have been stretched. However, we saw this unwind somewhat in the third quarter, and valuations in defensive sectors have been coming back to more attractive levels. I continue to seek opportunities to increase dividend yield for the portfolio, which may mean more of an emphasis on larger-cap holdings. However, capital appreciation potential remains a critical component of the funds strategy, and we continually conduct rigorous fundamental research to ensure we have solid, differentiated insights on the companies we select.

Q32012| At the close of a strong quarter, compelling opportunities remain for value investors

Putnam Equity Income Fund (PEYAX)

Annualized total return performance as of September 30, 2012 Class A shares (inception 6/15/77)
Last quarter 1 year 3 years 5 years 10 years Life of fund Total expense ratio: 1.12%

Before sales charge

8.17% 30.83 10.45 1.97 8.77 9.82

After sales charge

1.97% 23.30 8.30 0.77 8.13 9.64

Russell 1000 Value Index

6.51% 30.92 11.84 -0.90 8.17

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. To obtain the most recent month-end performance, visit putnam.com. The funds expense ratio is based on the most recent prospectus and is subject to change. Quarterly returns are cumulative. The Russell 1000 Value Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their value orientation. You cannot invest directly in an index.

The views and opinions expressed are those of Darren A. Jaroch, 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: Value stocks may fail to rebound, and the market may not favor value-style investing. Income provided by the fund may be reduced by changes in the dividend policies of, and the capital resources available at, the companies in which the fund invests. The prices of stocks may fall or fail to rise over extended periods of time for a variety of reasons, including both general financial market conditions and factors related to a specific issuer or industry. 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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