Equity Income Fund Annual Report - Putnam Investments

for mutual funds than for institutional clients,as well as the differences between the servicesthat Putnam Management provides to thePutnam funds and those that it provides to itsinstitutional clients. The Trustees did not rely onthese comparisons to any significant extent inconcluding that the management fees paid byyour fund are reasonable.Investment performanceThe quality of the investment process providedby Putnam Management represented a majorfactor in the Trustees’ evaluation of the qualityof services provided by Putnam Managementunder your fund’s management contract. TheTrustees were assisted in their review of thePutnam funds’ investment process and performanceby the work of the investment oversightcommittees of the Trustees, which meet on aregular basis with the funds’ portfolio teamsand with the Chief Investment Officer and othersenior members of Putnam Management’sInvestment Division throughout the year. TheTrustees concluded that Putnam Managementgenerally provides a high- quality investmentprocess — based on the experience and skills ofthe individuals assigned to the management offund portfolios, the resources made availableto them, and in general Putnam Management’sability to attract and retain high- quality personnel— but also recognized that this doesnot guarantee favorable investment results forevery fund in every time period.The Trustees considered that 2012 was a yearof strong competitive performance for many ofthe Putnam funds, with only a relatively smallnumber of exceptions. They noted that thisstrong performance was exemplified by thefact that the Putnam funds were recognized byBarron’s as the best performing mutual fundcomplex for 2012 — the second time in fouryears that Putnam Management has achievedthis distinction for the Putnam funds. They alsonoted, however, the disappointing investmentperformance of some funds for periods endedDecember 31, 2012 and considered informationprovided by Putnam Management regardingthe factors contributing to the underperformanceand actions being taken to improve theperformance of these particular funds. TheTrustees indicated their intention to continueto monitor performance trends to assess theeffectiveness of these efforts and to evaluatewhether additional actions to address areas ofunderperformance are warranted.For purposes of evaluating investment performance,the Trustees generally focus oncompetitive industry rankings for the one- year,three- year, and five- year periods. For a numberof Putnam funds with relatively uniqueinvestment mandates, the Trustees evaluatedperformance based on comparisons of theirtotal returns with the returns of selected investmentbenchmarks or targeted returns. In thecase of your fund, the Trustees considered thatits class A share cumulative total return performanceat net asset value was in the followingquartiles of its Lipper Inc. peer group (LipperEquity Income Funds) for the one- year, threeyearand five- year periods ended December 31,2012 (the first quartile representing the bestperformingfunds and the fourth quartile theworst-performing funds):One- year period1stThree- year period2ndFive- year period1stFor the one- year period ended December 31,2012, your fund’s performance was in the topdecile of its Lipper Inc. peer group. Over theone- year, three- year and five- year periodsended December 31, 2012, there were 313,247 and 216 funds, respectively, in your fund’sLipper peer group. (When considering performanceinformation, shareholders shouldbe mindful that past performance is not aguarantee of future results.)Equity Income Fund 21