Equity Income Fund Annual Report - Putnam Investments

and Putnam Management of such economiesof scale as may exist in the management of thefund at current asset levels.These conclusions were based on a comprehensiveconsideration of all information providedto the Trustees and were not the result of anysingle factor. Some of the factors that figuredparticularly in the Trustees’ deliberations andhow the Trustees considered these factors aredescribed below, although individual Trusteesmay have evaluated the information presenteddifferently, giving different weights to variousfactors. It is also important to recognize that themanagement arrangements for your fund andthe other Putnam funds are the result of manyyears of review and discussion between theIndependent Trustees and Putnam Management,that some aspects of the arrangementsmay receive greater scrutiny in some yearsthan others, and that the Trustees’ conclusionsmay be based, in part, on their consideration offee arrangements in previous years. For example,with some minor exceptions, the currentfee arrangements in the management contractsfor the Putnam funds were implementedat the beginning of 2010 following extensivereview and discussion by the Trustees, as wellas approval by shareholders.As noted above, the Trustees consideredadministrative revisions to your fund’s submanagementcontract. Putnam Managementrecommended that the sub- managementcontract be revised to reduce the submanagementfee that Putnam Managementpays to PIL with respect to the portion of theportfolios of certain funds, but not your fund,that may be allocated to PIL from time to time.The Independent Trustees’ approval of this recommendationwas based on their conclusionthat these changes would have no practicaleffect on Putnam Management’s continuedresponsibility for the management of thesefunds or the costs borne by fund shareholdersand would not result in any reduction in thenature and quality of services provided tothe funds.Management fee schedulesand total expensesThe Trustees reviewed the management feeschedules in effect for all Putnam funds, includingfee levels and breakpoints. The Trustees alsoreviewed the total expenses of each Putnamfund, recognizing that in most cases managementfees represented the major, but not thesole, determinant of total costs to shareholders.In reviewing fees and expenses, the Trusteesgenerally focus their attention on materialchanges in circumstances — for example,changes in assets under management, changesin a fund’s investment style, changes in PutnamManagement’s operating costs or profitability,or changes in competitive practices in themutual fund industry — that suggest that considerationof fee changes might be warranted.The Trustees concluded that the circumstancesdid not warrant changes to the managementfee structure of your fund.Under its management contract, your fundhas the benefit of breakpoints in its managementfee schedule that provide shareholderswith economies of scale in the form of reducedfee levels as assets under management in thePutnam family of funds increase. The Trusteesconcluded that the fee schedule in effectfor your fund represented an appropriatesharing of economies of scale between fundshareholders and Putnam Management.As in the past, the Trustees also focused on thecompetitiveness of each fund’s total expenseratio. In order to ensure that expenses of thePutnam funds continue to meet competitivestandards, the Trustees and Putnam Managementhave implemented certain expenselimitations. These expense limitations were:(i) a contractual expense limitation applicableto all retail open- end funds of 32 basis pointson investor servicing fees and expenses andEquity Income Fund 19