N-CSRS 1 a_vtmulticapvalue.htm PUTNAM VARIABLE TRUST a_vtmulticapvalue.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES



Investment Company Act file number: (811-05346)
Exact name of registrant as specified in charter: Putnam Variable Trust
Address of principal executive offices: One Post Office Square, Boston, Massachusetts 02109
Name and address of agent for service: Robert T. Burns, Vice President
One Post Office Square
Boston, Massachusetts 02109
Copy to:         Bryan Chegwidden, Esq.
Ropes & Gray LLP
1211 Avenue of the Americas
New York, New York 10036
Registrant’s telephone number, including area code: (617) 292-1000
Date of fiscal year end: December 31, 2014
Date of reporting period: January 1, 2014 — June 30, 2014



Item 1. Report to Stockholders:

The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940:



Message from the Trustees

Dear Shareholder:

After pulling back at the start of the year, equity markets resumed their steady advance through the halfway mark of 2014. In June, the S&P 500 Index posted its fifth consecutive month of gains. The bond market has also generated solid positive results across many sectors this year.

Underpinning these stable returns is growing evidence of an economy on the mend, including a strengthening jobs market, and accelerating consumer spending and business investment. Corporations are participating in this improvement, as reflected in stronger-than-expected earnings growth and heightened merger-and-acquisition activity.

One notable characteristic of this market environment is its historically low level of volatility — a relative calm that experience indicates does not last forever. As we move into the second half of the year, we also note that a range of geopolitical uncertainties could push risk levels higher. That said, Putnam offers a wide range of strategies for all market conditions, including portfolios designed for periods of higher market volatility.

As always, thank you for investing with Putnam.



Performance summary (as of 6/30/14)

Investment objective

Capital appreciation and, as a secondary objective, current income

Net asset value June 30, 2014

Class IA: $21.27  Class IB: $21.22 

 

Total return at net asset value

 

      Russell 3000 
(as of 6/30/14)  Class IA shares*  Class IB shares*  Value Index 
6 months  8.04%  7.86%  7.95% 
1 year  32.02  31.65  23.71 
5 years  165.41  162.05  141.50 
Annualized  21.56  21.25  19.28 
10 years  150.08  143.83  116.69 
Annualized  9.60  9.32  8.04 
Life  235.16  226.08  186.07 
Annualized  11.44  11.17  9.87 

 

For a portion of the periods, the fund had expense limitations, without which returns would have been lower.

* Class inception date: May 1, 2003.

The Russell 3000 Value Index is an unmanaged index of those companies in the broad-market Russell 3000 Index chosen for their value orientation.

Data represent past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate, and you may have a gain or a loss when you sell your shares. Performance information does not reflect any deduction for taxes a shareholder may owe on fund distributions or on the redemption of fund shares. All total return figures are at net asset value and exclude contract charges and expenses, which are added to the variable annuity contracts to determine total return at unit value. Had these charges and expenses been reflected, performance would have been lower. For more recent performance, contact your variable annuity provider who can provide you with performance that reflects the charges and expenses at your contract level.


Allocations are shown as a percentage of the fund’s net assets. Short-term investments and net other assets, if any, represent the market value weights of cash, derivatives, short-term securities, and other unclassified assets in the portfolio. Summary information may differ from the portfolio schedule included in the financial statements due to the inclusion of derivative securities, any interest accruals, the exclusion of as-of trades, if any, and the use of different classifications of securities for presentation purposes. Holdings and allocations may vary over time.

Putnam VT Multi-Cap Value Fund  1 

 


Report from your fund’s manager

Were U.S. equities a good place to be invested during the six months ended June 30, 2014?

It was a satisfying period for investors, with the U.S. stock market rally celebrating its fifth-year anniversary. However, 2014 started off on rocky footing in January as emerging-market worries and disappointing U.S. economic data sent stocks tumbling. Equities bounced back in February, but business remained weak for many companies due to the harsh winter weather. The outlook brightened during the spring with improvement in housing and employment trends as well as in sentiment among investors, who appeared to appreciate that the winter’s pent-up demand might lead to opportunities in the coming months.

The market rally was broad based, with 11 of the 12 underlying sectors comprising the fund’s benchmark, the Russell 3000 Value Index, registering positive returns. Against this backdrop, the fund’s class IA shares outperformed its benchmark. The fund’s emphasis on large- and mid-cap stocks during the period was beneficial as they outperformed smaller-cap stocks. In addition, the fund’s focus on value investing was rewarded since value stocks outperformed growth stocks for the period.

Have you made any shifts in the fund’s investment strategy given the length of the stock rally?

While we continue to have a bias toward mid-cap stocks, we are vigilant for opportunities across the entire market capitalization spectrum. However, many stocks have become fairly valued in our view. We believe that our fundamental, bottom-up investment discipline will help us dig deep to find good investment opportunities, which in recent months have tended to be in the industrials, consumer-oriented, and health-care sectors — areas where we tend to have overweight positions relative to the benchmark.

Which individual holdings made the greatest contributions to relative performance?

Halliburton, which provides products and services for oil and natural gas exploration and development, was a top performer. Profit margins have improved for Halliburton’s pressure-pumping business, and increased exploration and production activity has boosted demand for the company’s products. The company anticipates significant growth in its deep-water service businesses, a highly profitable source of revenue going forward, in my opinion. In mid-June, U.S. medical device maker Medtronic announced that it would be acquiring Dublin-based Covidien, which makes devices for a range of surgical procedures, for $43 billion. The merger would create a company close in size to the medical-device business of industry leader Johnson & Johnson. The fund’s investment in Covidien jumped more than 20% as a result of the announcement.

Which stocks had more disappointing results for the period?

ITT Educational Services, a provider of postsecondary degree programs, also came under pressure during the period. The stock struggled in response to an investigation into lending practices of third-party providers of student loans. The controversy precipitated a decline in new student enrollment and pressured ITT’s profitability. Like many in the retail sector, TJX experienced weak sales during the period, mostly in response to the harsh winter weather in many parts of the country that kept shoppers home-bound. As a result, the company’s profits and forward guidance were negatively affected.

What is your outlook for stocks during the second half of 2014?

My overall view is that the U.S. and global economies are likely to continue in a slow-growth mode for the next several months. Many observers have been arguing that, after more than 60 months of recovery, the current bull market should be stalling. But I’m not sure the current market cycle should be viewed as typical. Even though the Federal Reserve’s unwinding of economic stimulus has begun, monetary policy is still highly accommodative; inflation remains near a historic low; and short-term interest rates continue to hover just above zero percent. I believe this scenario bodes well for a continuation of the current slow-growth environment, which should also continue to be a boon for stock pickers and actively managed mutual funds such as this fund. Therefore, I believe stocks in many sectors still have room to advance, even if returns are likely to be more modest overall.

The views expressed in this report are exclusively those of Putnam Management and are subject to change. They are not meant as investment advice. Please note that the holdings discussed in this report may not have been held by the fund for the entire period. Portfolio composition is subject to review in accordance with the fund’s investment strategy and may vary in the future.

Consider these risks before investing: Investments in small and/or midsize companies increase the risk of greater price fluctuations. Value stocks may fail to rebound, and the market may not favor value-style investing. Stock 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.

Your fund’s manager

Portfolio Manager James A. Polk, CFA, joined Putnam in 1998 and has been in the investment industry since 1994.

Your fund’s manager may also manage other accounts advised by Putnam Management or an affiliate, including retail mutual fund counterparts to the funds in Putnam Variable Trust.

2  Putnam VT Multi-Cap Value Fund 

 


Understanding your fund’s expenses

As an investor in a variable annuity product that invests in a registered investment company, you pay ongoing expenses, such as management fees, distribution fees (12b-1 fees), and other expenses. Using the following information, you can estimate how these expenses affect your investment and compare them with the expenses of other funds. You may also pay one-time transaction expenses, which are not shown in this section and would result in higher total expenses. Charges and expenses at the insurance company separate account level are not reflected. For more information, see your fund’s prospectus or talk to your financial representative.

Review your fund’s expenses

The first two columns in the following table show the expenses you would have paid on a $1,000 investment in your fund from January 1, 2014, to June 30, 2014. They also show how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses. To estimate the ongoing expenses you paid over the period, divide your account value by $1,000, then multiply the result by the number in the first line for the class of shares you own.

Compare your fund’s expenses with those of other funds

The two right-hand columns of the table show your fund’s expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total costs) of investing in the fund with those of other funds. All shareholder reports of mutual funds and funds serving as variable annuity vehicles will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period.

  Expenses and value for a  Expenses and value for a 
  $1,000 investment, assuming  $1,000 investment, assuming a 
  actual returns for the 6 months  hypothetical 5% annualized return 
  ended 6/30/14    for the 6 months ended 6/30/14 
 
 
  Class IA  Class IB  Class IA  Class IB 
 
Expenses paid         
per $1,000*†  $4.13  $5.41  $4.01  $5.26 
 
Ending value         
(after expenses)  $1,080.40  $1,078.60  $1,020.83  $1,019.59 
 
Annualized         
expense ratio  0.80%  1.05%  0.80%  1.05% 

 

*Expenses for each share class are calculated using the fund’s annualized expense ratio for each class, which represents the ongoing expenses as a percentage of average net assets for the six months ended 6/30/14. The expense ratio may differ for each share class.

†Expenses based on actual returns are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Expenses based on a hypothetical 5% return are calculated by multiplying the expense ratio by the average account value for the six-month period; then multiplying the result by the number of days in the six-month period; and then dividing that result by the number of days in the year.

Putnam VT Multi-Cap Value Fund  3 

 


The fund’s portfolio 6/30/14 (Unaudited)

COMMON STOCKS (97.5%)*  Shares  Value 
 
Aerospace and defense (6.9%)     
Alliant Techsystems, Inc.  4,420  $591,926 
General Dynamics Corp.  4,540  529,137 
Honeywell International, Inc.  7,780  723,151 
L-3 Communications Holdings, Inc.  5,230  631,523 
Northrop Grumman Corp.  5,230  625,665 
    3,101,402 
Airlines (1.7%)     
Alaska Air Group, Inc.  3,170  301,309 
Delta Air Lines, Inc.  12,040  466,189 
    767,498 
Auto components (0.7%)     
Johnson Controls, Inc.  6,600  329,538 
    329,538 
Banks (4.5%)     
Bancorp, Inc. (The) † S  15,101  179,853 
BB&T Corp.  5,070  199,910 
City National Corp.  4,850  367,436 
First BanCorp. (Puerto Rico) †  24,250  131,920 
First Republic Bank  7,160  393,728 
PacWest Bancorp  8,970  387,235 
Regions Financial Corp.  34,900  370,638 
    2,030,720 
Beverages (3.2%)     
Coca-Cola Enterprises, Inc.  30,320  1,448,690 
    1,448,690 
Capital markets (6.4%)     
Ameriprise Financial, Inc.  5,488  658,560 
Carlyle Group LP (The)  21,360  725,386 
Charles Schwab Corp. (The)  21,040  566,607 
E*Trade Financial Corp. †  19,120  406,491 
KKR & Co. LP  7,280  177,122 
Raymond James Financial, Inc.  6,382  323,759 
    2,857,925 
Chemicals (2.0%)     
Axiall Corp. S  8,410  397,541 
Dow Chemical Co. (The)  9,750  501,735 
    899,276 
Commercial services and supplies (2.0%)     
Tyco International, Ltd.  19,860  905,616 
    905,616 
Containers and packaging (6.2%)     
MeadWestvaco Corp.  8,590  380,193 
Packaging Corp. of America  4,690  335,288 
Rock-Tenn Co. Class A  1,600  168,944 
Sealed Air Corp.  15,520  530,318 
Silgan Holdings, Inc.  26,850  1,364,517 
    2,779,260 
Diversified consumer services (1.0%)     
DeVry Education Group, Inc.  6,320  267,589 
ITT Educational Services, Inc. † S  10,783  179,968 
    447,557 
Electric utilities (2.5%)     
Edison International  7,510  436,406 
Entergy Corp.  3,210  263,509 
Great Plains Energy, Inc. S  15,170  407,618 
    1,107,533 
Electrical equipment (1.0%)     
AMETEK, Inc.  8,222  429,846 
    429,846 
Electronic equipment, instruments, and components (0.8%)     
Anixter International, Inc.  3,560  356,249 
    356,249 

 

COMMON STOCKS (97.5%)* cont.  Shares  Value 
 
Energy equipment and services (3.9%)     
Ensco PLC Class A (United Kingdom) S  4,440  $246,731 
Halliburton Co.  14,120  1,002,661 
Transocean, Ltd. (Switzerland)  6,277  282,653 
Weatherford International PLC †  9,640  221,720 
    1,753,765 
Food products (1.0%)     
Kellogg Co.  6,840  449,388 
    449,388 
Health-care equipment and supplies (6.8%)     
Alere, Inc. †  19,720  737,922 
Covidien PLC  2,336  210,660 
Merit Medical Systems, Inc. †  43,979  664,083 
OraSure Technologies, Inc. †  40,540  349,049 
St. Jude Medical, Inc.  11,110  769,368 
Zimmer Holdings, Inc.  3,170  329,236 
    3,060,318 
Health-care providers and services (1.7%)     
Aetna, Inc.  3,580  290,266 
Mednax, Inc. †  8,260  480,319 
    770,585 
Household durables (4.3%)     
Garmin, Ltd. S  4,520  275,268 
Harman International Industries, Inc.  6,690  718,707 
Jarden Corp. †  7,910  469,459 
Whirlpool Corp.  3,210  446,896 
    1,910,330 
Insurance (6.9%)     
American International Group, Inc.  15,780  861,272 
Assured Guaranty, Ltd.  9,850  241,325 
Genworth Financial, Inc. Class A †  28,650  498,510 
Hartford Financial Services Group, Inc. (The)  19,466  697,077 
Marsh & McLennan Cos., Inc.  4,540  235,263 
XL Group PLC  17,790  582,267 
    3,115,714 
IT Services (2.1%)     
Computer Sciences Corp.  8,970  566,904 
Fidelity National Information Services, Inc.  6,970  381,538 
    948,442 
Machinery (2.1%)     
Snap-On, Inc.  5,490  650,675 
Wabtec Corp.  3,590  296,498 
    947,173 
Marine (0.8%)     
Baltic Trading, Ltd. S  32,968  197,149 
Diana Shipping, Inc. (Greece) † S  16,470  179,358 
    376,507 
Media (1.1%)     
Regal Entertainment Group Class A S  24,040  507,244 
    507,244 
Multi-utilities (0.8%)     
PG&E Corp. S  7,410  355,828 
    355,828 
Oil, gas, and consumable fuels (5.1%)     
Apache Corp.  2,520  253,562 
Energen Corp.  2,760  245,309 
Marathon Oil Corp.  5,610  223,951 
Penn Virginia Corp. †  9,380  158,991 
QEP Resources, Inc.  11,490  396,405 
Royal Dutch Shell PLC ADR (United Kingdom)  4,589  377,996 
Talisman Energy, Inc. (Canada)  59,250  628,050 
    2,284,264 
Personal products (0.9%)     
Coty, Inc. Class A S  23,830  408,208 
    408,208 

 

4  Putnam VT Multi-Cap Value Fund 

 


COMMON STOCKS (97.5%)* cont.  Shares  Value 
 
Pharmaceuticals (9.6%)     
Actavis PLC † S  6,080  $1,356,144 
Endo International PLC †  7,320  512,546 
Impax Laboratories, Inc. †  10,300  308,896 
Jazz Pharmaceuticals PLC †  4,570  671,836 
Medicines Co. (The) †  9,360  272,002 
Prestige Brands Holdings, Inc. †  14,622  495,540 
Teva Pharmaceutical Industries, Ltd. ADR (Israel)  13,020  682,508 
    4,299,472 
Real estate investment trusts (REITs) (1.6%)     
American Capital Agency Corp.  14,970  350,448 
CYS Investments, Inc. S  38,920  351,058 
    701,506 
Real estate management and development (0.6%)     
RE/MAX Holdings, Inc. Class A S  9,107  269,476 
    269,476 
Road and rail (1.1%)     
Genesee & Wyoming, Inc. Class A †  4,510  473,550 
    473,550 
Semiconductors and semiconductor equipment (1.6%)     
Micron Technology, Inc. †  22,500  741,375 
    741,375 
Software (0.6%)     
Symantec Corp.  12,360  283,044 
    283,044 
Specialty retail (2.9%)     
American Eagle Outfitters, Inc. S  9,570  107,375 
Best Buy Co., Inc. S  12,370  383,594 
Gap, Inc. (The)  5,370  223,231 
TJX Cos., Inc. (The)  11,050  587,308 
    1,301,508 
Technology hardware, storage, and peripherals (2.1%)     
Hewlett-Packard Co.  11,300  380,584 
NetApp, Inc.  5,878  214,665 
SanDisk Corp.  3,350  349,841 
    945,090 

 

COMMON STOCKS (97.5%)* cont.  Shares  Value 
 
Thrifts and mortgage finance (0.2%)     
Radian Group, Inc. S  6,480  $95,969 
    95,969 
Trading companies and distributors (0.8%)     
DXP Enterprises, Inc. †  1,303  98,429 
WESCO International, Inc. † S  2,870  247,911 
    346,340 
 
Total common stocks (cost $31,807,381)    $43,806,206 
 
SHORT-TERM INVESTMENTS (14.8%)*  Shares  Value 
 
Putnam Cash Collateral Pool, LLC 0.18% d  5,113,101  $5,113,101 
Putnam Short Term Investment Fund 0.07% L  1,543,541  1,543,541 
Total short-term investments (cost $6,656,642)    $6,656,642 
 
Total investments (cost $38,464,023)    $50,462,848 

 

Key to holding’s abbreviations

 

ADR  American Depository Receipts: represents ownership of foreign securities on deposit with a custodian bank 

 

Notes to the fund’s portfolio

Unless noted otherwise, the notes to the fund’s portfolio are for the close of the fund’s reporting period, which ran from January 1, 2014 through June 30, 2014 (the reporting period). Within the following notes to the portfolio, references to “ASC 820” represent Accounting Standards Codification 820 Fair Value Measurements and Disclosures and references to “OTC”, if any, represent over-the-counter.

* Percentages indicated are based on net assets of $44,908,726.

† Non-income-producing security.

d Affiliated company. See Note 1 to the financial statements regarding securities lending. The rate quoted in the security description is the annualized 7-day yield of the fund at the close of the reporting period.

L Affiliated company (Note 5). The rate quoted in the security description is the annualized 7-day yield of the fund at the close of the reporting period.

S Security on loan, in part or in entirety, at the close of the reporting period (Note 1).

ASC 820 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of the fund’s investments. The three levels are defined as follows:

Level 1: Valuations based on quoted prices for identical securities in active markets.

Level 2: Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3: Valuations based on inputs that are unobservable and significant to the fair value measurement.

The following is a summary of the inputs used to value the fund’s net assets as of the close of the reporting period:

    Valuation inputs   
Investments in securities:  Level 1  Level 2  Level 3 
Common stocks*:       
Consumer discretionary  $4,496,177  $—  $— 
Consumer staples  2,306,286  —  — 
Energy  4,038,029  —  — 
Financials  9,071,310  —  — 
Health care  8,130,375  —  — 
Industrials  7,347,932  —  — 
Information technology  3,274,200  —  — 
Materials  3,678,536  —  — 
Utilities  1,463,361  —  — 
Total common stocks  43,806,206  —  — 
Short-term investments  1,543,541  5,113,101  — 
Totals by level  $45,349,747  $5,113,101  $— 

 

* Common stock classifications are presented at the sector level, which may differ from the fund’s portfolio presentation.

The accompanying notes are an integral part of these financial statements.

Putnam VT Multi-Cap Value Fund  5 

 


Statement of assets and liabilities
6/30/14 (Unaudited)

Assets   
Investment in securities, at value, including $4,995,901 of securities on loan (Note 1):   
Unaffiliated issuers (identified cost $31,807,381)  $43,806,206 
Affiliated issuers (identified cost $6,656,642) (Notes 1 and 5)  6,656,642 
Cash  11 
Dividends, interest and other receivables  72,267 
Receivable for shares of the fund sold  3,970 
Total assets  50,539,096 
 
Liabilities   
Payable for investments purchased  374,555 
Payable for shares of the fund repurchased  47,729 
Payable for compensation of Manager (Note 2)  20,158 
Payable for investor servicing fees (Note 2)  6,252 
Payable for custodian fees (Note 2)  3,183 
Payable for Trustee compensation and expenses (Note 2)  39,347 
Payable for administrative services (Note 2)  71 
Payable for distribution fees (Note 2)  2,741 
Collateral on securities loaned, at value (Note 1)  5,113,101 
Other accrued expenses  23,233 
Total liabilities  5,630,370 
 
Net assets  $44,908,726 
 
Represented by   
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4)  $29,419,557 
Undistributed net investment income (Note 1)  239,082 
Accumulated net realized gain on investments (Note 1)  3,251,262 
Net unrealized appreciation of investments  11,998,825 
Total — Representing net assets applicable to capital shares outstanding  $44,908,726 
 
Computation of net asset value Class IA   
Net assets  $31,509,596 
Number of shares outstanding  1,481,324 
Net asset value, offering price and redemption price per share (net assets divided by number of shares outstanding)  $21.27 
 
Computation of net asset value Class IB   
Net assets  $13,399,130 
Number of shares outstanding  631,330 
Net asset value, offering price and redemption price per share (net assets divided by number of shares outstanding)  $21.22 

 

The accompanying notes are an integral part of these financial statements.

6  Putnam VT Multi-Cap Value Fund 

 


Statement of operations
Six months ended 6/30/14 (Unaudited)

Investment income   
Dividends (net of foreign tax of $4,016)  $470,489 
Interest (including interest income of $207 from investments in affiliated issuers) (Note 5)  212 
Securities lending (Note 1)  9,897 
Total investment income  480,598 
 
Expenses   
Compensation of Manager (Note 2)  120,883 
Investor servicing fees (Note 2)  22,086 
Custodian fees (Note 2)  6,278 
Trustee compensation and expenses (Note 2)  1,359 
Distribution fees (Note 2)  16,314 
Administrative services (Note 2)  454 
Auditing and tax fees  13,049 
Other  10,532 
Total expenses  190,955 
 
Expense reduction (Note 2)  (2,233) 
Net expenses  188,722 
 
Net investment income  291,876 
 
Net realized gain on investments (Notes 1 and 3)  3,748,804 
Net unrealized depreciation of investments during the period  (642,526) 
Net gain on investments  3,106,278 
 
Net increase in net assets resulting from operations  $3,398,154 

 

Statement of changes in net assets

  Six months ended  Year ended 
  6/30/14*  12/31/13 
Increase in net assets     
Operations:     
Net investment income  $291,876  $367,146 
Net realized gain on investments  3,748,804  5,262,792 
Net unrealized appreciation (depreciation) of investments  (642,526)  8,035,562 
Net increase in net assets resulting from operations  3,398,154  13,665,500 
Distributions to shareholders (Note 1):     
From ordinary income     
Net investment income     
Class IA  (283,104)  (374,274) 
Class IB  (89,313)  (147,498) 
Decrease from capital share transactions (Note 4)  (2,538,473)  (2,997,830) 
Total increase in net assets  487,264  10,145,898 
Net assets:     
Beginning of period  44,421,462  34,275,564 
End of period (including undistributed net investment income of $239,082 and $319,623, respectively)  $44,908,726  $44,421,462 

 

* Unaudited.

The accompanying notes are an integral part of these financial statements.

Putnam VT Multi-Cap Value Fund  7 

 


Financial highlights (For a common share outstanding throughout the period)

          LESS                 
INVESTMENT OPERATIONS:      DISTRIBUTIONS:        RATIOS AND SUPPLEMENTAL DATA:   
Period ended Net asset value, beginning of period Net investment income (loss)a Net realized and unrealized gain (loss) on investments Total from investment operations From net investment income Total distributions Non-recurring reimbursements Net asset value, end of period Total return at net asset value (%)b,c Net assets, end of period (in thousands) Ratio of expenses to average net assets (%)b,d Ratio of net investment income (loss) to average net assets (%) Portfolio turnover (%)
Class IA                           
6/30/14†  $19.87  .14  1.45  1.59  (.19)  (.19)  —  $21.27  8.04*  $31,510  .40*  .70*  36* 
12/31/13  14.16  .17  5.78  5.95  (.24)  (.24)  —  19.87  42.43  31,051  .81  1.01  85 
12/31/12  12.23  .17  1.85  2.02  (.09)  (.09)  —  14.16  16.50  23,414  .85  1.30  81 
12/31/11  12.92  .06  (.68)  (.62)  (.07)  (.07)  —e,f  12.23  (4.87)  23,338  .84  .50  82 
12/31/10  10.44  .04  2.49  2.53  (.05)  (.05)  —  12.92  24.32  30,052  .86  .39  111 
12/31/09  7.55  .05  2.90  2.95  (.06)  (.06)  —  10.44  39.54  25,771  .92g  .61g  130 
Class IB                           
6/30/14†  $19.81  .12  1.43  1.55  (.14)  (.14)  —  $21.22  7.86*  $13,399  .52*  .57*  36* 
12/31/13  14.12  .13  5.76  5.89  (.20)  (.20)  —  19.81  42.07  13,370  1.06  .77  85 
12/31/12  12.19  .14  1.84  1.98  (.05)  (.05)  —  14.12  16.26  10,861  1.10  1.06  81 
12/31/11  12.88  .03  (.69)  (.66)  (.03)  (.03)  —e,f  12.19  (5.12)  10,648  1.09  .25  82 
12/31/10  10.41  .02  2.48  2.50  (.03)  (.03)  —  12.88  24.06  14,125  1.11  .14  111 
12/31/09  7.52  .03  2.89  2.92  (.03)  (.03)  —  10.41  39.00  13,587  1.17g  .35g  130 

 

* Not annualized.

† Unaudited.

a Per share net investment income (loss) has been determined on the basis of weighted average number of shares outstanding during the period.

b The charges and expenses at the insurance company separate account level are not reflected.

c Total return assumes dividend reinvestment.

d Includes amounts paid through expense offset and brokerage/service arrangements, if any (Note 2). Also excludes acquired fund fees and expenses, if any.

e Amount represents less than $0.01 per share.

f Reflects a non-recurring reimbursement related to restitution amounts in connection with a distribution plan approved by the Securities and Exchange Commission (the SEC) which amounted to less $0.01 per share outstanding on July 21, 2011. Also reflects a non-recurring reimbursement related to short-term trading related lawsuits, which amounted to less than $0.01 per share outstanding on May 11, 2011.

g Reflects an involuntary contractual expense limitation in effect during the period. As a result of such limitation, the expenses of each class reflect a reduction of 0.14% of average net assets as of December 31, 2009.

The accompanying notes are an integral part of these financial statements.

8  Putnam VT Multi-Cap Value Fund 

 


Notes to financial statements 6/30/14 (Unaudited)

Within the following Notes to financial statements, references to “State Street” represent State Street Bank and Trust Company, references to “the SEC” represent the Securities and Exchange Commission, references to “Putnam Management” represent Putnam Investment Management, LLC, the fund’s manager, an indirect wholly-owned subsidiary of Putnam Investments, LLC and references to “OTC”, if any, represent over-the-counter. Unless otherwise noted, the “reporting period” represents the period from January 1, 2014 through June 30, 2014.

Putnam VT Multi-Cap Value Fund (the fund) is a diversified series of Putnam Variable Trust (the Trust), a Massachusetts business trust registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The investment objective of the fund is to seek capital appreciation and, as a secondary objective, current income by investing mainly in common stocks of U.S. companies of any size, with a focus on value stocks. Value stocks are issued by companies that Putnam Management believes are currently undervalued by the market. If Putnam Management is correct and other investors recognize the value of the company, the price of its stock may rise. Putnam Management may consider, among other factors, a company’s valuation, financial strength, growth potential, competitive position in its industry, projected future earnings, cash flows and dividends when deciding whether to buy or sell investments. The fund seeks current income as a secondary objective.

The fund offers class IA and class IB shares of beneficial interest. Class IA shares are offered at net asset value and are not subject to a distribution fee. Class IB shares are offered at net asset value and pay an ongoing distribution fee, which is identified in Note 2.

In the normal course of business, the fund enters into contracts that may include agreements to indemnify another party under given circumstances. The fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be, but have not yet been, made against the fund. However, the fund’s management team expects the risk of material loss to be remote.

Note 1 — Significant accounting policies

The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations. Actual results could differ from those estimates. Subsequent events after the Statement of assets and liabilities date through the date that the financial statements were issued have been evaluated in the preparation of the financial statements.

Investment income, realized and unrealized gains and losses and expenses of the fund are borne pro-rata based on the relative net assets of each class to the total net assets of the fund, except that each class bears expenses unique to that class (including the distribution fees applicable to such classes). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. If the fund were liquidated, shares of each class would receive their pro-rata share of the net assets of the fund. In addition, the Trustees declare separate dividends on each class of shares.

Security valuation Investments for which market quotations are readily available are valued at the last reported sales price on their principal exchange, or official closing price for certain markets, and are classified as Level 1 securities under Accounting Standards Codification 820 Fair Value Measurements and Disclosures (ASC 820). If no sales are reported, as in the case of some securities that are traded OTC, a security is valued at its last reported bid price and is generally categorized as a Level 2 security.

Investments in open-end investment companies (excluding exchange traded funds), if any, which can be classified as Level 1 or Level 2 securities, are valued based on their net asset value. The net asset value of such investment companies equals the total value of their assets less their liabilities and divided by the number of their outstanding shares.

Many securities markets and exchanges outside the U.S. close prior to the close of the New York Stock Exchange and therefore the closing prices for securities in such markets or on such exchanges may not fully reflect events that occur after such close but before the close of the New York Stock Exchange. Accordingly, on certain days, the fund will fair value foreign equity securities taking into account multiple factors including movements in the U.S. securities markets, currency valuations and comparisons to the valuation of American Depository Receipts, exchange-traded funds and futures contracts. These securities, which would generally be classified as Level 1 securities, will be transferred to Level 2 of the fair value hierarchy when they are valued at fair value. The number of days on which fair value prices will be used will depend on market activity and it is possible that fair value prices will be used by the fund to a significant extent. Securities quoted in foreign currencies, if any, are translated into U.S. dollars at the current exchange rate. Short-term securities with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value and are classified as Level 2 securities.

To the extent a pricing service or dealer is unable to value a security or provides a valuation that Putnam Management does not believe accurately reflects the security’s fair value, the security will be valued at fair value by Putnam Management in accordance with policies and procedures approved by the Trustees. Certain investments, including certain restricted and illiquid securities and derivatives, are also valued at fair value following procedures approved by the Trustees. These valuations consider such factors as significant market or specific security events such as interest rate or credit quality changes, various relationships with other securities, discount rates, U.S. Treasury, U.S. swap and credit yields, index levels, convexity exposures and recovery rates. These securities are classified as Level 2 or as Level 3 depending on the priority of the significant inputs.

Such valuations and procedures are reviewed periodically by the Trustees. The fair value of securities is generally determined as the amount that the fund could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. By its nature, a fair value price is a good faith estimate of the value of a security in a current sale and does not reflect an actual market price, which may be different by a material amount.

Security transactions and related investment income Security transactions are recorded on the trade date (the date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis.

Interest income, net of any applicable withholding taxes, is recorded on the accrual basis. Dividend income, net of any applicable withholding taxes, is recognized on the ex-dividend date except that certain dividends from foreign securities, if any, are recognized as soon as the fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair value of the securities received. Dividends representing a return of capital or capital gains, if any, are reflected as a reduction of cost and/or as a realized gain.

Securities lending The fund may lend securities, through its agent, to qualified borrowers in order to earn additional income. The loans are collateralized by cash in an amount at least equal to the fair value of the securities loaned. The fair value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk of borrower default will be borne by the fund’s agent; the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the Statement of operations. Cash collateral is invested in Putnam Cash Collateral Pool, LLC, a limited liability company managed by an affiliate of Putnam Management. Investments in Putnam Cash Collateral Pool, LLC are valued at its closing net asset value each business day. There are no management fees charged to Putnam Cash Collateral Pool, LLC. At the close of the reporting period, the fund received cash collateral of $5,113,101 and the value of securities loaned amounted to $4,995,901.

Interfund lending The fund, along with other Putnam funds, may participate in an interfund lending program pursuant to an exemptive order issued by the SEC. This program allows the fund to borrow from or lend to other Putnam funds that permit such transactions. Interfund lending transactions are subject to each fund’s investment policies and borrowing and lending limits. Interest earned or paid on the interfund lending transaction will be based on the average of certain current market rates. During the reporting period, the fund did not utilize the program.

Lines of credit The fund participates, along with other Putnam funds, in a $392.5 million ($315 million prior to June 27, 2014) unsecured committed line of credit and a $235.5 million ($185 million prior to June 27, 2014) unsecured

Putnam VT Multi-Cap Value Fund  9 

 


uncommitted line of credit, both provided by State Street. Borrowings may be made for temporary or emergency purposes, including the funding of shareholder redemption requests and trade settlements. Interest is charged to the fund based on the fund’s borrowing at a rate equal to the Federal Funds rate plus 1.25% for the committed line of credit and the Federal Funds rate plus 1.30% for the uncommitted line of credit. A closing fee equal to 0.04% (0.02% prior to June 27, 2014) of the committed line of credit and 0.04% ($50,000 prior to June 27, 2014) of the uncommitted line of credit has been paid by the participating funds. In addition, a commitment fee of 0.11% per annum on any unutilized portion of the committed line of credit is allocated to the participating funds based on their relative net assets and paid quarterly. During the reporting period, the fund had no borrowings against these arrangements.

Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time period and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended (the Code), applicable to regulated investment companies.

The fund is subject to the provisions of Accounting Standards Codification 740 Income Taxes (ASC 740). ASC 740 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The fund did not have a liability to record for any unrecognized tax benefits in the accompanying financial statements. No provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. Each of the fund’s federal tax returns for the prior three fiscal years remains subject to examination by the Internal Revenue Service.

At December 31, 2013, the fund had a capital loss carryover of $386,163 available to the extent allowed by the Code to offset future net capital gain, if any. The amounts of the carryovers and the expiration dates are:

Loss carryover
Short-term  Long-term  Total  Expiration 
$386,163  N/A  $386,163  12/31/17 

 

Under the Regulated Investment Company Modernization Act of 2010, the fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred will be required to be utilized prior to the losses incurred in pre-enactment tax years. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law.

The aggregate identified cost on a tax basis is $38,575,403, resulting in gross unrealized appreciation and depreciation of $12,166,701 and $279,256, respectively, or net unrealized appreciation of $11,887,445.

Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Dividend sources are estimated at the time of declaration. Actual results may vary. Any non-taxable return of capital cannot be determined until final tax calculations are completed after the end of the fund’s fiscal year. Reclassifications are made to the fund’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations.

Expenses of the Trust Expenses directly charged or attributable to any fund will be paid from the assets of that fund. Generally, expenses of the Trust will be allocated among and charged to the assets of each fund on a basis that the Trustees deem fair and equitable, which may be based on the relative assets of each fund or the nature of the services performed and relative applicability to each fund.

Beneficial interest At the close of the reporting period, insurance companies or their separate accounts were record owners of all but a de minimis number of the shares of the fund. Approximately 43.2% of the fund is owned by accounts of one insurance company.

Note 2 — Management fee, administrative services and other transactions

The fund pays Putnam Management a management fee (based on the fund’s average net assets and computed and paid monthly) at annual rates that may vary based on the average of the aggregate net assets of most open-end funds, as defined in the fund’s management contract, sponsored by Putnam Management. Such annual rates may vary as follows:

0.710%  of the first $5 billion, 
0.660%  of the next $5 billion, 
0.610%  of the next $10 billion, 
0.560%  of the next $10 billion, 
0.510%  of the next $50 billion, 
0.490%  of the next $50 billion, 
0.480%  of the next $100 billion and 
0.475%  of any excess thereafter. 

 

The fund’s shareholders approved the fund’s current management contract with Putnam Management effective February 27, 2014. Shareholders were asked to approve the fund’s management contract following the death on October 8, 2013 of The Honourable Paul G. Desmarais, who had controlled directly and indirectly a majority of the voting shares of Power Corporation of Canada, the ultimate parent company of Putnam Management. The substantive terms of the management contract, including terms relating to fees, are identical to the terms of the fund’s previous management contract and reflect the rates provided in the table above.

Putnam Management has contractually agreed, through June 30, 2015, to waive fees or reimburse the fund’s expenses to the extent necessary to limit the cumulative expenses of the fund, exclusive of brokerage, interest, taxes, investment-related expenses, extraordinary expenses, acquired fund fees and expenses and payments under the fund’s investor servicing contract, investment management contract and distribution plans, on a fiscal year-to-date basis to an annual rate of 0.20% of the fund’s average net assets over such fiscal year-to-date period. During the reporting period, the fund’s expenses were not reduced as a result of this limit.

Putnam Investments Limited (PIL), an affiliate of Putnam Management, is authorized by the Trustees to manage a separate portion of the assets of the fund as determined by Putnam Management from time to time. Putnam Management pays a quarterly sub-management fee to PIL for its services at an annual rate of 0.35% of the average net assets of the portion of the fund managed by PIL.

The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees.

Custodial functions for the fund’s assets are provided by State Street. Custody fees are based on the fund’s asset level, the number of its security holdings and transaction volumes.

Putnam Investor Services, Inc., an affiliate of Putnam Management, provides investor servicing agent functions to the fund. Putnam Investor Services, Inc. was paid a monthly fee for investor servicing at an annual rate of 0.10% of the fund’s average net assets. During the reporting period, the expenses for each class of shares related to investor servicing fees were as follows:

Class IA  $15,506 
Class IB  6,580 
Total  $22,086 

 

The fund has entered into expense offset arrangements with Putnam Investor Services, Inc. and State Street whereby Putnam Investor Services, Inc.’s and State Street’s fees are reduced by credits allowed on cash balances. The fund also reduced expenses through brokerage/service arrangements. For the reporting period, the fund’s expenses were not reduced under the expense offset arrangements and were reduced by $2,233 under the brokerage/service arrangements.

Each independent Trustee of the fund receives an annual Trustee fee, of which $27, as a quarterly retainer, has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees also are reimbursed for expenses they incur relating to their services as Trustees.

10  Putnam VT Multi-Cap Value Fund 

 


The fund has adopted a Trustee Fee Deferral Plan (the Deferral Plan) which allows the Trustees to defer the receipt of all or a portion of Trustees fees payable on or after July 1, 1995. The deferred fees remain invested in certain Putnam funds until distribution in accordance with the Deferral Plan.

The fund has adopted an unfunded noncontributory defined benefit pension plan (the Pension Plan) covering all Trustees of the fund who have served as a Trustee for at least five years and were first elected prior to 2004. Benefits under the Pension Plan are equal to 50% of the Trustee’s average annual attendance and retainer fees for the three years ended December 31, 2005. The retirement benefit is payable during a Trustee’s lifetime, beginning the year following retirement, for the number of years of service through December 31, 2006. Pension expense for the fund is included in Trustee compensation and expenses in the Statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the Statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003.

The fund has adopted a distribution plan (the Plan) with respect to its class IB shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plan is to compensate Putnam Retail Management Limited Partnership, an indirect wholly-owned subsidiary of Putnam Investments, LLC, for services provided and expenses incurred in distributing shares of the fund. The Plan provides for payment by the fund to Putnam Retail Management Limited Partnership at an annual rate of up to 0.35% of the average net assets attributable to the fund’s class IB shares. The Trustees have approved payment by the fund at an annual rate of 0.25% of the average net assets attributable to the fund’s class IB shares. During the reporting period, the class specific expenses related to distribution fees were as follows:

Class IB  $16,314 

 

Note 3 — Purchases and sales of securities

During the reporting period, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $15,653,489 and $18,873,624, respectively. There were no purchases or proceeds from sales of long-term U.S. government securities.

Note 4 — Capital shares

At the close of the reporting period, there was an unlimited number of shares of beneficial interest authorized. Subscriptions and redemptions are presented at the omnibus level. Transactions in capital shares were as follows:

    Class IA shares      Class IB shares   
  Six months ended 6/30/14  Year ended 12/31/13  Six months ended 6/30/14  Year ended 12/31/13 
 
  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount 
Shares sold  89,163  $1,785,646  162,297  $2,795,819  25,493  $504,892  98,652  $1,688,896 
Shares issued in connection with reinvestment                 
of distributions  14,155  283,104  23,854  374,274  4,472  89,313  9,413  147,498 
  103,318  2,068,750  186,151  3,170,093  29,965  594,205  108,065  1,836,394 
Shares repurchased  (184,401)  (3,719,325)  (276,861)  (4,635,674)  (73,615)  (1,482,103)  (202,345)  (3,368,643) 
Net decrease  (81,083)  $(1,650,575)  (90,710)  $(1,465,581)  (43,650)  $(887,898)  (94,280)  $(1,532,249) 

 

Note 5 — Affiliated transactions

Transactions during the reporting period with Putnam Short Term Investment Fund, which is under common ownership and control, were as follows:

  Fair value at the beginning of        Fair value at the end of the 
Name of affiliate  the reporting period  Purchase cost  Sale proceeds  Investment income  reporting period 
Putnam Short Term Investment Fund*  $408,314  $9,347,036  $8,211,809  $207  $1,543,541 
Total  $408,314  $9,347,036  $8,211,809  $207  $1,543,541 

 

* Management fees charged to Putnam Short Term Investment Fund have been waived by Putnam Management.

Note 6 — Market, credit and other risks

In the normal course of business, the fund trades financial instruments and enters into financial transactions where risk of potential loss exists due to changes in the market (market risk) or failure of the contracting party to the transaction to perform (credit risk). The fund may be exposed to additional credit risk that an institution or other entity with which the fund has unsettled or open transactions will default. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations.

Putnam VT Multi-Cap Value Fund  11 

 


Shareholder meeting results (Unaudited)
February 27, 2014 special meeting

At the meeting, each of the nominees for Trustees was elected, with all funds of the Trust voting together as a single class, as follows:

  Votes for  Votes withheld 
Liaquat Ahamed  545,333,593  24,865,496 
Ravi Akhoury  545,906,178  24,292,911 
Barbara M. Baumann  549,255,821  20,943,268 
Jameson A. Baxter  548,878,213  21,320,877 
Charles B. Curtis  548,266,326  21,932,764 
Robert J. Darretta  548,954,413  21,244,676 
Katinka Domotorffy  547,720,210  22,478,879 
John A. Hill  548,926,132  21,272,957 
Paul L. Joskow  548,318,739  21,880,351 
Kenneth R. Leibler  549,128,017  21,071,073 
Robert E. Patterson  548,989,554  21,209,535 
George Putnam, III  548,805,405  21,393,685 
Robert L. Reynolds  549,170,754  21,028,335 
W. Thomas Stephens  548,523,544  21,675,546 

 

A proposal to approve a new management contract between the fund and Putnam Management was approved as follows:

 

Votes for  Votes against  Abstentions  Broker non-votes 
1,947,845  102,971  216,875  — 

 

A proposal to adopt an Amended and Restated Declaration of Trust was approved, with all funds of the Trust voting together as a single class, as follows:

 

Votes for  Votes against  Abstentions  Broker non-votes 
507,595,281  19,452,349  43,151,459  — 

 

All tabulations are rounded to the nearest whole number.

 

12  Putnam VT Multi-Cap Value Fund 

 


Trustee approval of management contract

General conclusions

The Board of Trustees of the Putnam funds oversees the management of each fund and, as required by law, determines annually whether to approve the continuance of your fund’s management contract with Putnam Investment Management, LLC (“Putnam Management”) and the sub-management contract with respect to your fund between Putnam Management and its affiliate, Putnam Investments Limited (“PIL”). The Board of Trustees, with the assistance of its Contract Committee, requests and evaluates all information it deems reasonably necessary under the circumstances in connection with its annual contract review. The Contract Committee consists solely of Trustees who are not “interested persons” (as this term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”)) of the Putnam funds (“Independent Trustees”).

At the outset of the review process, members of the Board’s independent staff and independent legal counsel met with representatives of Putnam Management to review the annual contract review materials furnished to the Contract Committee during the course of the previous year’s review and to discuss possible changes in these materials that might be necessary or desirable for the coming year. Following these discussions and in consultation with the Contract Committee, the Independent Trustees’ independent legal counsel requested that Putnam Management furnish specified information, together with any additional information that Putnam Management considered relevant, to the Contract Committee. Over the course of several months ending in June 2014, the Contract Committee met on a number of occasions with representatives of Putnam Management, and separately in executive session, to consider the information that Putnam Management provided, as well as supplemental information provided in response to additional requests made by the Contract Committee. Throughout this process, the Contract Committee was assisted by the members of the Board’s independent staff and by independent legal counsel for the Putnam funds and the Independent Trustees.

In May 2014, the Contract Committee met in executive session to discuss and consider its preliminary recommendations with respect to the continuance of the contracts. At the Trustees’ June 20, 2014 meeting, the Contract Committee met in executive session with the other Independent Trustees to review a summary of the key financial, performance and other data that the Contract Committee considered in the course of its review. The Contract Committee then presented its written report, which summarized the key factors that the Committee had considered and set forth its final recommendations. The Contract Committee then recommended, and the Independent Trustees approved, the continuance of your fund’s management and sub-management contracts, effective July 1, 2014. (Because PIL is an affiliate of Putnam Management and Putnam Management remains fully responsible for all services provided by PIL, the Trustees have not attempted to evaluate PIL as a separate entity, and all subsequent references to Putnam Management below should be deemed to include reference to PIL as necessary or appropriate in the context.)

The Independent Trustees’ approval was based on the following conclusions:

• That the fee schedule in effect for your fund represented reasonable compensation in light of the nature and quality of the services being provided to the fund, the fees paid by competitive funds, and the costs incurred by Putnam Management in providing services to the fund; and

• That the fee schedule in effect for your fund represented an appropriate sharing between fund shareholders and Putnam Management of such economies of scale as may exist in the management of the fund at current asset levels.

These conclusions were based on a comprehensive consideration of all information provided to the Trustees and were not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations and how the Trustees considered these factors are described below, although individual Trustees may have evaluated the information presented differently, giving different weights to various factors. It is also important to recognize that the management arrangements for your fund and the other Putnam funds are the result of many years of review and discussion between the Independent Trustees and Putnam Management, that some aspects of the arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of fee arrangements in previous years. For example, with some minor exceptions, the current fee arrangements under the management contracts for the Putnam funds were implemented at the beginning of 2010 following extensive review by the Contract Committee and discussions with representatives of Putnam Management, as well as approval by shareholders. Shareholders also voted overwhelmingly to approve these fee arrangements again in early 2014, when they were asked to approve new management contracts (with the same fees and substantially identical other provisions) following the possible termination of the previous management contracts as a result of the death of the Honorable Paul G. Desmarais. (Mr. Desmarais, both directly and through holding companies, controlled a majority of the voting shares of Power Corporation of Canada, which (directly and indirectly) is the majority owner of Putnam Management. Mr. Desmarais’ voting control of shares of Power Corporation of Canada was transferred to The Desmarais Family Residuary Trust upon his death and this transfer, as a technical matter, may have constituted an “assignment” within the meaning of the 1940 Act, causing the Putnam funds’ management contracts to terminate automatically.)

Management fee schedules and total expenses

The Trustees reviewed the management fee schedules in effect for all Putnam funds, including fee levels and breakpoints. The Trustees also reviewed the total expenses of each Putnam fund, recognizing that in most cases management fees represented the major, but not the sole, determinant of total costs to shareholders.

In reviewing fees and expenses, the Trustees generally focus their attention on material changes in circumstances — for example, changes in assets under management, changes in a fund’s investment style, changes in Putnam Management’s operating costs or profitability, or changes in competitive practices in the mutual fund industry — that suggest that consideration of fee changes might be warranted. The Trustees concluded that the circumstances did not warrant changes to the management fee structure of your fund.

Under its management contract, your fund has the benefit of breakpoints in its management fee schedule that provide shareholders with economies of scale in the form of reduced fee levels as assets under

Putnam VT Multi-Cap Value Fund  13 

 


management in the Putnam family of funds increase. The Trustees concluded that the fee schedule in effect for your fund represented an appropriate sharing of economies of scale between fund shareholders and Putnam Management.

As in the past, the Trustees also focused on the competitiveness of each fund’s total expense ratio. In order to ensure that expenses of the Putnam funds continue to meet competitive standards, the Trustees and Putnam Management have implemented certain expense limitations. These expense limitations were: (i) a contractual expense limitation applicable to all retail open-end funds of 32 basis points on investor servicing fees and expenses and (ii) a contractual expense limitation applicable to all open-end funds of 20 basis points on so-called “other expenses” (i.e., all expenses exclusive of management fees, investor servicing fees, distribution fees, investment-related expenses, interest, taxes, brokerage commissions, extraordinary expenses and acquired fund fees and expenses). These expense limitations serve in particular to maintain competitive expense levels for funds with large numbers of small shareholder accounts and funds with relatively small net assets. Most funds, including your fund, had sufficiently low expenses that these expense limitations did not apply. Putnam Management’s support for these expense limitation arrangements was an important factor in the Trustees’ decision to approve the continuance of your fund’s management and sub-management contracts.

The Trustees reviewed comparative fee and expense information for a custom group of competitive funds selected by Lipper Inc. (“Lipper”). This comparative information included your fund’s percentile ranking for effective management fees and total expenses (excluding any applicable 12b-1 fee), which provides a general indication of your fund’s relative standing. In the custom peer group, your fund ranked in the third quintile in effective management fees (determined for your fund and the other funds in the custom peer group based on fund asset size and the applicable contractual management fee schedule) and in the third quintile in total expenses (excluding any applicable 12b-1 fees) as of December 31, 2013 (the first quintile representing the least expensive funds and the fifth quintile the most expensive funds). The fee and expense data reported by Lipper as of December 31, 2013 reflected the most recent fiscal year-end data available in Lipper’s database at that time.

In connection with their review of the management fees and total expenses of the Putnam funds, the Trustees also reviewed the costs of the services provided and the profits realized by Putnam Management and its affiliates from their contractual relationships with the funds. This information included trends in revenues, expenses and profitability of Putnam Management and its affiliates relating to the investment management, investor servicing and distribution services provided to the funds. In this regard, the Trustees also reviewed an analysis of Putnam Management’s revenues, expenses and profitability, allocated on a fund-by-fund basis, with respect to the funds’ management, distribution, and investor servicing contracts. For each fund, the analysis presented information about revenues, expenses and profitability for each of the agreements separately and for the agreements taken together on a combined basis. The Trustees concluded that, at current asset levels, the fee schedules in place represented reasonable compensation for the services being provided and represented an appropriate sharing of such economies of scale as may exist in the management of the Putnam funds at that time.

The information examined by the Trustees as part of their annual contract review for the Putnam funds has included for many years information regarding fees charged by Putnam Management and its affiliates to institutional clients such as defined benefit pension plans, college endowments, and the like. This information included comparisons of those fees with fees charged to the Putnam funds, as well as an assessment of the differences in the services provided to these different types of clients. The Trustees observed that the differences in fee rates between institutional clients and mutual funds are by no means uniform when examined by individual asset sectors, suggesting that differences in the pricing of investment management services to these types of clients may reflect historical competitive forces operating in separate markets. The Trustees considered the fact that in many cases fee rates across different asset classes are higher on average for mutual funds than for institutional clients, as well as the differences between the services that Putnam Management provides to the Putnam funds and those that it provides to its institutional clients. The Trustees did not rely on these comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.

Investment performance

The quality of the investment process provided by Putnam Management represented a major factor in the Trustees’ evaluation of the quality of services provided by Putnam Management under your fund’s management contract. The Trustees were assisted in their review of the Putnam funds’ investment process and performance by the work of the investment oversight committees of the Trustees, which meet on a regular basis with the funds’ portfolio teams and with the Chief Investment Officer and other senior members of Putnam Management’s Investment Division throughout the year. The Trustees concluded that Putnam Management generally provides a high-quality investment process — based on the experience and skills of the individuals assigned to the management of fund portfolios, the resources made available to them, and in general Putnam Management’s ability to attract and retain high-quality personnel — but also recognized that this does not guarantee favorable investment results for every fund in every time period.

The Trustees considered that 2013 was a year of strong competitive performance for many of the Putnam funds, with only a relatively small number of exceptions. They noted that this strong performance was exemplified by the fact that the Putnam funds were recognized by Barron’s as the second-best performing mutual fund complex for both 2013 and the five-year period ended December 31, 2013. They also noted, however, the disappointing investment performance of some funds for periods ended December 31, 2013 and considered information provided by Putnam Management regarding the factors contributing to the underperformance and actions being taken to improve the performance of these particular funds. The Trustees indicated their intention to continue to monitor performance trends to assess the effectiveness of these efforts and to evaluate whether additional actions to address areas of underperformance are warranted.

For purposes of evaluating investment performance, the Trustees generally focus on competitive industry rankings for the one-year, three-year and five-year periods. For a number of Putnam funds with relatively unique investment mandates for which meaningful competitive performance rankings are not considered available, the Trustees evaluated performance based on comparisons of their returns with the returns of selected investment benchmarks. In the case of your

14  Putnam VT Multi-Cap Value Fund 

 


fund, the Trustees considered that its class IA share cumulative total return performance at net asset value was in the following quartiles of its Lipper peer group (Lipper VP (Underlying Funds) — Multi-Cap Value Funds) for the one-year, three-year and five-year periods ended December 31, 2013 (the first quartile representing the best-performing funds and the fourth quartile the worst-performing funds):

One-year period  Three-year period  Five-year period 
1st  1st  1st 

 

Over the one-year, three-year and five-year periods ended December 31, 2013, there were 53, 53 and 50 funds, respectively, in your fund’s Lipper peer group. (When considering performance information, shareholders should be mindful that past performance is not a guarantee of future results.)

Brokerage and soft-dollar allocations; investor servicing

The Trustees considered various potential benefits that Putnam Management may receive in connection with the services it provides under the management contract with your fund. These include benefits related to brokerage allocation and the use of soft dollars, whereby a portion of the commissions paid by a fund for brokerage may be used to acquire research services that are expected to be useful to Putnam Management in managing the assets of the fund and of other clients. Subject to policies established by the Trustees, soft dollars generated by these means are used primarily to acquire brokerage and research services that enhance Putnam Management’s investment capabilities and supplement Putnam Management’s internal research efforts. However, the Trustees noted that a portion of available soft dollars continues to be used to pay fund expenses. The Trustees indicated their continued intent to monitor regulatory and industry developments in this area with the assistance of their Brokerage Committee and also indicated their continued intent to monitor the allocation of the Putnam funds’ brokerage in order to ensure that the principle of seeking best price and execution remains paramount in the portfolio trading process.

Putnam Management may also receive benefits from payments that the funds make to Putnam Management’s affiliates for investor or distribution services. In conjunction with the annual review of your fund’s management and sub-management contracts, the Trustees reviewed your fund’s investor servicing agreement with Putnam Investor Services, Inc. (“PSERV”) and its distributor’s contracts and distribution plans with Putnam Retail Management Limited Partnership (“PRM”), both of which are affiliates of Putnam Management. The Trustees concluded that the fees payable by the funds to PSERV and PRM, as applicable, for such services are reasonable in relation to the nature and quality of such services, the fees paid by competitive funds, and the costs incurred by PSERV and PRM, as applicable, in providing such services.

Putnam VT Multi-Cap Value Fund  15 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

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16  Putnam VT Multi-Cap Value Fund 

 


Other important information

Proxy voting

Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds’ proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2014, are available in the Individual Investors section of putnam.com and on the SEC’s website, www.sec.gov. If you have questions about finding forms on the SEC’s website, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds’ proxy voting guidelines and procedures at no charge by calling Putnam’s Shareholder Services at 1-800-225-1581.

Fund portfolio holdings

Each Putnam VT fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund’s Forms N-Q on the SEC’s website at www.sec.gov. In addition, the fund’s Forms N-Q may be reviewed and copied at the SEC’s public reference room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC’s website or the operation of the public reference room.

Fund information

Investment Manager  Investor Servicing Agent  Trustees 
Putnam Investment Management, LLC  Putnam Investor Services, Inc.  Jameson A. Baxter, Chair 
One Post Office Square  Mailing address:  Liaquat Ahamed 
Boston, MA 02109  P.O. Box 8383  Ravi Akhoury 
  Boston, MA 02266-8383  Barbara M. Baumann 
Investment Sub-Manager  1-800-225-1581  Charles B. Curtis 
Putnam Investments Limited    Robert J. Darretta 
57–59 St James’s Street  Custodian  Katinka Domotorffy 
London, England SW1A 1LD  State Street Bank and Trust Company  John A. Hill 
    Paul L. Joskow 
Marketing Services  Legal Counsel  Kenneth R. Leibler 
Putnam Retail Management  Ropes & Gray LLP  Robert E. Patterson 
One Post Office Square    George Putnam, III 
Boston, MA 02109    Robert L. Reynolds 
    W. Thomas Stephens 

 

The fund’s Statement of Additional Information contains additional information about the fund’s Trustees and is available without charge upon request by calling 1-800-225-1581.

 

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This report has been prepared for the shareholders    H519 
of Putnam VT Multi-Cap Value Fund.  289191 8/14 

 

Item 2. Code of Ethics:
Not applicable
Item 3. Audit Committee Financial Expert:
Not applicable
Item 4. Principal Accountant Fees and Services:
Not applicable
Item 5. Audit Committee of Listed Registrants
Not applicable
Item 6. Schedule of Investments:
The registrant’s schedule of investments in unaffiliated issuers is included in the report to shareholders in Item 1 above.

Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End Management Investment Companies:

Not applicable
Item 8. Portfolio Managers of Closed-End Investment Companies
Not Applicable
Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers:

Not applicable
Item 10. Submission of Matters to a Vote of Security Holders:
Not applicable
Item 11. Controls and Procedures:
(a) The registrant’s principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the design and operation of such procedures are generally effective to provide reasonable assurance that information required to be disclosed by the registrant in this report is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

(b) Changes in internal control over financial reporting: Not applicable
Item 12. Exhibits:
(a)(1) Not applicable
(a)(2) Separate certifications for the principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are filed herewith.

(b) The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940, as amended, are filed herewith.

Putnam Variable Trust
By (Signature and Title):
/s/Janet C. Smith
Janet C. Smith
Principal Accounting Officer

Date: August 27, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By (Signature and Title):
/s/Jonathan S. Horwitz
Jonathan S. Horwitz
Principal Executive Officer

Date: August 27, 2014
By (Signature and Title):
/s/Steven D. Krichmar
Steven D. Krichmar
Principal Financial Officer

Date: August 27, 2014