A strong year for fund performance

---

Q4 2020 Putnam Emerging Markets Equity Fund Q&A

• The fund underperformed the benchmark for the quarter, but outperformed for the 1-, 3-, 5-, 10-year, and life-of-fund periods ended December 31, 2020.
• Our two-part investment process includes creating a custom watch list of 500 to 600 stocks and conducting at least 500 calls with management teams each year.
• We focus on the fundamentals and growth potential of companies in sectors that are underrepresented in the index.

How did the fund perform in the fourth quarter?

For the fourth quarter, the fund underperformed its benchmark, the MSCI Emerging Markets Index [ND]. However, we are pleased to report that the fund outperformed its benchmark by over 18% for the 2020 calendar year. It also outperformed the benchmark for the 3-, 5-, 10-year, and life-of-fund periods ended December 31, 2020.

What contributed to the strong 2020 performance for the fund?

We believe it is due to our consistent investment approach, which often has enabled us to deliver outperformance despite declines in the broader market — and when either value stocks or growth stocks took the lead.

We have a two-part investment process. First, we create a custom watch list of 500 to 600 stocks out of a universe of 3,500. We believe the businesses on our custom list have superior return potential, more durable moats, better sustainability characteristics, above-average profitability, and strong balance sheets. On a fundamental basis, these are the types of businesses that we want to own.

The hardest work comes with the next step in our process. Every year, we strive to hold at least 500 calls with management teams. We build dozens of proprietary models, looking for a differentiated view of long-term earnings relative to consensus expectations. Our research has indicated that if a company beats expectations, its stock subsequently outperforms by 35%. From these fundamental steps, we build a portfolio of our best ideas, which typically consists of 50 to 60 stocks.

In your view, what is the advantage of an actively managed portfolio in the emerging markets universe?

We believe there are three key reasons our active approach can outperform. The first relates to our underweight exposure to SOEs, or state-owned enterprises. These businesses are predominantly owned by emerging-market governments. We found that stocks of these companies — which account for over 20% of our benchmark index — tend to underperform those of private companies.

The second advantage of our active approach relates to index construction. While the S&P 500 Index is a fair representation of the underlying U.S. economy, this is not the case for emerging markets equity indexes. For example, in China, the index is dominated by large financial institutions while the consumer and health-care sectors are underrepresented. Health care accounts for just 2% of the index in China versus 12% in the United States. We dig deep in our research and focus on the fundamentals and growth potential of companies within these underrepresented sectors.

Finally, emerging markets are incredibly inefficient. U.S. company Amazon is covered by over 50 investment banks. In contrast, one of our key holdings, Taiwan-based Universal Vision Biotech, has no analyst coverage. We are able to conduct deep-dive research on this and other under-covered companies while many of our competitors are unable to do so.