PUTNAM INVESTMENTS | putnam.com

Key takeaways•While U.S. stocks finished the quarter with positive results, a range of global assets lost ground as bond yields jumped and commodity prices fell.

•The portfolio’s emphasis on U.S. equities and an underweight to interest-rate risk, while helpful, did not offset declines across a range of global investments.

•The fund continues to pursue a flexible balance of risk exposures.

Would you review the fund’s risk positioning and the rationale behind it?We continued our generally favorable attitude toward risk assets, tilting the portfolio toward equities and credit-sensitive areas, particularly high-yield bonds. We felt that some of the more interest-rate-sensitive areas of the fixed-income market — for instance U.S. Treasuries and investment-grade credits — were less attractive, given the U.S. economy’s still-modest recovery and the likelihood of interest rates moving higher at some point in the future.

Within that slight tilt toward equities, we had a bias toward owning U.S. stocks, with less emphasis on international equities. While stocks had positive returns for the quarter, the fund’s U.S. equity options collar, a type of derivative implemented to hedge market risk, had disappointing results. This strategy can underperform when the stock market rallies strongly but with little volatility, which is how stocks performed in May.

Within fixed income, we favored the more credit-sensitive areas of the market, as well as some out-of-index areas of fixed income, such as high yield and mort-gage credit, which we felt were more attractively priced and offered better yields than Treasuries or agency debt.

Interest rates have been at historically low levels for some time, as the Federal Reserve Board has kept rates artificially low in its attempts to stimulate a recovery from the Great Recession of 2007–08. Toward the end of the second quarter, however, the Fed signaled that this period of loose monetary policy might be scaled back at some time in the future if the U.S. economy continues to pick up speed and the unemployment rate continues to drop.

It was this pronouncement by the Fed — and the markets’ swift reaction to it — that was the catalyst for much of the volatility across global risk assets in June. However, given our outlook for only moderate growth and subdued inflation in the U.S. economy, we believe it is likely that short-term interest rates will remain near current levels for the rest of this year. Accordingly, we have shifted from an underweight in interest-rate-sensitive assets to a position more in line with that of the benchmark.

Q2 | 2013 » Putnam Dynamic Risk Allocation Fund Q&A

Risk assets continued to drive performance

Portfolio Managers

James A. Fetch(industry since 1994)

Robert J. Kea, CFA(industry since 1988)

Joshua B. Kutin, CFA(industry since 1998)

Robert J. Schoen(industry since 1990)

Jason R. Vaillancourt, CFA(industry since 1993)

Q2 2013 | Risk assets continued to drive performance

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What changes, if any, are you making in portfolio positions for the third quarter?In spite of recent market volatility, we do not believe that a lot has changed from a fundamental point of view; there-fore, we have not made any major tactical changes in the portfolio. We continue to have a pro-cyclical attitude, which is conducive to owning risk assets in the current environment. Investor sentiment at quarter-end does not suggest a high level of concern about a sustained pull-back in equities. While we believe that equity valuations are not extremely cheap, they are also not extremely expensive either. That said, we may choose to take advantage of market volatility to add to equity positions when we believe they are attractively priced.

How would you describe the portfolio’s investment philosophy?This portfolio pursues the best risk-adjusted returns possible within the volatility framework of a traditional 60/40 balanced portfolio by focusing on risk allocation instead of traditional capital, or dollar, allocation. We developed this approach from over a decade of experi-ence working together as multi-asset investors and seeing the limitations of a traditional balanced strategy. It became clear to us that the traditional formula for a balanced portfolio was actually not balanced in terms of risk, because about 90% of the risk came from the 60% equity allocation. As a result, the performance of a 60/40 portfolio was highly correlated with the stock market, both rising and falling with stocks.

With this portfolio, we reduce the emphasis that equity risk has had on a traditional balanced port-folio, and then offset equity risk with other types of risk — credit, inflation, and interest-rate — in order to diversify sources of portfolio risk and return. We can also de-emphasize equity risk by using a variety of options strategies, which can hedge the risk of market volatility. A last major ingredient is a moderate amount of leverage, achieved using derivatives rather than borrowing. The leverage gives us an effective tool for targeting more precisely the level of risk of a traditional balanced fund.

We believe investors can benefit from a strategy that delivers greater risk efficiency. In our view, this fund can serve a wide range of investors as a core holding, and represents an evolution in portfolio design that can lead to more effective compounding of returns over time.

PUTNAM INVESTMENTS | putnam.com

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Putnam Dynamic Risk Allocation Fund (PDREX)

Annualized total return performance as of June 30, 2013

Class A shares (inception 9/19/11) Before sales charge After sales charge

Putnam Dynamic Risk Allocation Blended Index

Last quarter -5.50% -10.94% 1.38%

1 year 2.12 -3.75 8.31

Life of fund* 4.72 1.29 7.09

Total expense ratio: 1.86%

What you pay: 1.41%

1The short-term results of a relatively new fund are not necessarily indicative of its long-term prospects.

Returns for periods of less than one year are not annualized.

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 after sales charge assumes reinvestment of distributions and does not account for taxes. After-sales-charge returns reflect a maximum 5.75% load. The fund’s expense ratio is based on the most recent prospectus and is subject to change. What you pay reflects Putnam Management’s decision to contractually limit expenses through 9/30/13. To obtain the most recent month-end performance, visit putnam.com.

The fund's benchmark is administered by Putnam Investments and has the following composition: 50% MSCI World Index (ND), 40% Barclays Global Aggregate Bond Index, and 10% S&P Goldman Sachs Commodity Index. Barclays Global Aggregate Bond Index is an unmanaged index of global investment-grade fixed-income securities. MSCI World Index (ND) is a free float-adjusted market capitalization weighted index of equity securities that is designed to measure the equity market performance of developed markets. S&P Goldman Sachs Commodity Index is a composite index of commodity sector returns that represents a broadly diversified, unleveraged, long-only position in commodity futures. Securities in the fund do not match those in the indexes, and performance of the fund will differ. It is not possible to invest directly in an index.

Q2 2013 | Risk assets continued to drive performance

The views and opinions expressed are those of the portfolio managers as of June 30, 2013, are subject to change with market conditions, and are not meant as investment advice.

Consider these risks before investing: International investing involves currency, economic, and political risks. Emerging-market securities carry illiquidity and volatility risks. The fund may invest a portion of its assets in small and/or midsize companies. Such investments increase the risk of greater price fluctuations. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk and the risk that they may increase in value less when interest rates decline and decline in value more when interest rates rise. Allocation of assets among asset classes may hurt performance, and efforts to diversify risk through the use of leverage and allocation decisions may not be successful. Derivatives carry additional risks, such as the inability to terminate or sell derivatives positions and the failure of the other party to meet its obligations. Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. Bond investments are subject to interest-rate risk (the risk of bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments). Interest-rate risk is greater for longer-term bonds, and credit risk is greater for below-investment-grade bonds. Unlike bonds, funds that invest in bonds have fees and expenses. Active trading strategies may lose money or not earn a return sufficient to cover trading and other costs. Use of leverage obtained through derivatives increases these risks by increasing investment exposure. Over- the-counter derivatives are also subject to the risk of the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. REITs are subject to the risk of economic downturns that have an adverse impact on real estate markets. The use of short selling may result in losses if the securities appreciate in value. Commodities involve market, political, regulatory, and natural conditions risks. Stock and bond prices may fall or fail to rise over time for several reasons, including general financial market conditions and factors related to a specific issuer or industry. You can lose money by investing in the fund.

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

Putnam Investments | One Post Office Square | Boston, MA 02109 | putnam.com II918 281766 7/13