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Key takeaways•Volatility declined in the third quarter of 2012, and leveraged companies

performed well as the markets became more comfortable with risk assets.

•Portfolio Manager David Glancy continued to find and exploit mispriced

opportunities in financials and saw value among select natural resources stocks

in the wake of commodity market volatility.

•Bank debt and high-yield bonds continue to look less attractive relative to

leveraged-company equities.

How did leveraged-company securities perform in the third quarter of 2012?Some of the macroeconomic pressures that had dogged leveraged companies

in the second quarter let up in the third, and that helped the performance of

these securities. Situations that have created volatile conditions earlier this year

are not resolved, but on balance, the economic data flow buoyed the markets

in the third quarter, and the latest round of quantitative easing from the U.S.

Federal Reserve may anchor interest rates at their historical lows for some

time to come. In an improving economic environment, where access to credit

is generally available, leveraged securities may tend to perform better than if

conditions were more challenging.

How did the Spectrum Funds perform in this environment?The funds performed well, and each fund exceeded its benchmark for the

quarter. Cash in the portfolios, while it came down to varying degrees in the

funds, continued to buffer fluctuations in the value of the portfolios’ securities.

Q3 | 2012 » Putnam Spectrum Funds Q&A

Leveraged companies amid constructive marketsDavid L. GlancyPortfolio Manager

“ I continue to believe that fixed income could underperform equities for the next year or two.”

Q3 2012 | Leveraged companies amid constructive markets

2

In the wake of second-quarter market weakness, did any particular sectors offer compelling valuations?I added to some of the portfolios’ existing positions,

and traded opportunistically in certain financials and

natural resources stocks. While I did not make any

material changes to the funds’ exposure to specific

sectors, I did target certain unique opportunities that

I believe the market misunderstood in financials and,

against the backdrop of volatile commodity prices,

underappreciated in natural resources.

Some of the large U.S. financials that have offered

attractive opportunities since late 2011 are not leveraged

companies that finance their operations through debt,

but their business models are fundamentally based on

borrowing and lending, which makes them uniquely

tied to corporate- and consumer-based leverage and

interest-rate dynamics.

As an investor with a long history in leveraged-company investing, what is most important to you when you evaluate a company? Knowing as much as I can about a company’s balance

sheet is key. Profitability projections can sometimes be

better than a balance sheet can support, so I evaluate

how a company has capitalized itself and whether it is

more likely to benefit as a result of its debt structure or to

face challenges resulting from it.

Debt is often looked at in terms of its contractual

elements while equities are not viewed this way. But

investors in equities also have expectations for what they

should be earning on their investments, whether that

takes the form of current income or capital appreciation.

If I feel confident that a company can meet its debt

obligations, then I can put my expectations for the equity

alongside the contractual income expectations and

make a call on which part of the capital structure is most

attractive. For the companies I feel most confident about,

I want to be an equity shareholder; that way, my exposure

can benefit from the company’s full upside potential.

So far this year, you have leaned toward equities versus bonds in Capital Spectrum Fund, and you have found high yield to be more attractive than bank debt. Is this still your view? My view has not changed regarding the relative attrac-

tiveness of these security types. One of the metrics I

use to compare equities with debt is the free-cash-flow

yield. Today, equity free-cash-flow yields are in the mid

to high single digits, while high-yield bonds offer yields

in the mid-single-digit range. Bank loans, meanwhile, are

priced off historically low LIBOR rates; 1-year LIBOR, for

example, has been hovering around 1%.

I continue to believe that fixed income in general could

underperform equities for the next year or two, and so

my bias in Capital Spectrum Fund — which has full flex-

ibility to invest across the capital structure — remains

toward stocks.

Nevertheless, in Capital Spectrum Fund you maintain exposure to high-yield bonds. Where do you see the best opportunities there?High-yield debt gives companies two things that bank

loans cannot: longer maturities and less restrictive cove-

nants. These two features give leveraged companies

the breathing room they need to execute their business

plans and grow asset values without having to repay

principal right away.

At about 10% of the portfolio, the current weighting to

bonds is not very large or particularly diverse in Capital

Spectrum Fund. On a company-by-company basis, I

think the yield and capital appreciation features of these

securities can be quite attractive, particularly for the

risk/reward they represent. Generally, the more predict-

able the cash flow a company has, the more debt it can

support. Companies that have chosen to use high-yield

debt are, in many cases, better off today because they

have renewed flexibility and less vulnerability to future

interest-rate increases.

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3

Turning to equities, what makes for a strong leveraged-company opportunity, in your view? The best opportunities are strong free-cash-flow

companies with an intrinsic value that is higher than the

market may recognize. I generally do not see a lot of

value in very small companies that are dependent on the

capital markets being kind to them. Some of the funds’

top equity holdings, for example, have billions in debt,

but generally it is long-term, unsecured, non-amortizing

debt that looks and feels like preferred stock. It is not

bank debt with onerous covenants, and the companies

can generate a healthy cash flow that helps ensure they

can pay their ongoing obligations. If I feel confident in

the debt structure and the company’s earning power,

and if the markets do not recognize the opportunity,

then that may be a good moment to establish a position

in the company’s stock.

You have frequently commented on the benefit of having a large cash position in the funds. Do you continue to keep cash levels high?Having cash on hand enables me to act quickly when

I find investment opportunities, and it serves to

collateralize occasional short positions. Cash also acts

as a natural diversifier, as both Equity Spectrum Fund

and Capital Spectrum Fund have relatively concentrated

portfolios with a focus on companies that can be

inherently volatile — amplifying the downside and the

upside of macro-driven declines or advances.

That said, I did add to some positions in both portfolios

where I have high conviction, and as already discussed,

I established positions in some stocks I thought the

market was mispricing.

What is your strategy with short positions?Shorting is not a primary strategy, but it can provide a

potential edge over funds that are long-only and fully

invested. Generally, I will take a short position when I

believe the market or a particular security is overvalued

and where there is a clear catalyst for a decline in price.

Cash received from short sales is not reinvested in

long positions.

In a volatile, predominantly macro-driven environment,

I emphasize cash rather than short positions. By and

large, corporations are healthy, so there are not as many

fundamental-oriented calls to make where shorts are

warranted, in my view. Year to date, there have been

essentially no short positions in either fund.

Having run a hedge fund before coming to Putnam, what do you believe are the benefits to investors of the Spectrum Funds, which have some of the same flexibility as hedge funds? The funds offer a number of benefits relative to hedge

funds, in my view, starting with a more economical

fee structure. The mutual fund regulatory framework

ensures a high degree of liquidity and transparency. And

while the funds can short securities, actively hold cash,

and concentrate their exposures, there is no leverage in

the portfolios.

What is your outlook for the markets?Despite the positive direction markets ultimately took

in the third quarter, I expect we will see a low-growth

environment going forward, which means we should be

prepared for more market disruptions. In this economi-

cally uncertain scenario, any number of factors can

generate higher volatility simply because growth is so

vulnerable. Anxiety over sovereign debt exposures in

Europe is not going away anytime soon, for example, and

U.S. growth, while stabilizing, is not particularly robust.

The silver lining of this, I believe, is that the funds are

structured to tolerate volatility and take advantage

of market fluctuations, whether these are due to

changes in sentiment or changes in the fundamentals

of the economy. As the securities of what I consider

good investments go down in price, they can present

compelling buying opportunities — the chance to gain

exposure to companies that I believe can survive volatile

periods and still present a strong case for attractive

upside potential.

Q3 2012 | Leveraged companies amid constructive markets

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The views and opinions expressed are those of David L. Glancy, Portfolio Manager of Putnam Spectrum Funds, as of

September 30, 2012. They are subject to change with market conditions and are not meant as investment advice.

Consider these risks before you invest: 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.

Our focus on leveraged companies and the fund’s “non-diversified” status can increase the fund’s vulnerability to these

factors. Our use of short selling may increase these risks. 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.

For Capital Spectrum Fund, the following risks also apply: Lower-rated bonds may offer higher yields in return for more

risk. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely

to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may

default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is

generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest

in bonds have ongoing fees and expenses.

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.

Putnam Retail Management | One Post Office Square | Boston, MA 02109 | putnam.com

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. The short-term results of a relatively new fund are not necessarily indicative

of its long-term prospects. 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. To obtain the most recent month-end performance, visit putnam.com.

The funds’ expense ratios are based on the most recent prospectus and are subject to change.

Quarterly returns are cumulative.

Putnam Capital Spectrum Fund (PVSAX)

Class A shares (inception 5/18/09)

Before sales

chargeAfter sales

charge

Capital Spectrum Blended Index*

Last quarter 5.45% -0.61% 5.49%

1 year 28.81 21.42 25.05

3 years 18.60 16.28 13.80

Life of fund 21.83 19.69 18.56

Total expense ratio: 1.32%

150% S&P 500 Index/50% JPMorgan Developed High Yield Index.

Putnam Equity Spectrum Fund (PYSAX)

Class A shares (inception 5/18/09)

Before sales

chargeAfter sales

charge

S&P 500 Index

Last quarter 7.27% 1.11% 6.35%

1 year 30.62 23.11 30.20

3 years 19.85 17.50 13.20

Life of fund 25.05 22.86 17.07

Total expense ratio: 1.55%

Annualized total return performance as of September 30, 2012