N-CSR 1 a_vtresearch.htm PUTNAM VARIABLE TRUST a_vtresearch.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, 2016
Date of reporting period : January 1, 2016 — December 31, 2016



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:

With 2017 under way, investor sentiment generally brightened at the prospect of moving beyond the challenges of the past year, when politics tested markets. Fortunately, market turbulence in the aftermath of key political events was in many cases followed by impressive rebounds, and annual performance in most global financial markets exceeded expectations.

Of course, uncertainties and macroeconomic risks do not simply disappear with the close of the calendar year. Conditions in the bond market have changed given the shift in the potential for inflation. As such, we believe investors should continue to focus on time-tested strategies: maintain a well-diversified portfolio, keep a long-term view, and do not overreact to short-term market fluctuations. To help ensure that your portfolio is aligned with your individual goals, time horizon, and tolerance for risk, we also believe it is a good idea to speak regularly with your financial advisor.

In today’s environment, we favor the investment approach practiced at Putnam — active strategies based on fundamental research. Putnam portfolio managers, backed by a network of global analysts, bring years of experience to navigating changing market conditions and pursuing investment opportunities. In the following pages, you will find an overview of your fund’s performance for the reporting period ended December 31, 2016, as well as an outlook for the coming months.

As always, thank you for investing with Putnam.



Performance summary (as of 12/31/16)

Investment objective
Capital appreciation

Net asset value December 31, 2016

Class IA: $21.87  Class IB: $21.83 

 

Total return at net asset value

(as of 12/31/16)*  Class IA shares†  Class IB shares†  S&P 500 Index 
1 year  10.32%  10.03%  11.96% 
5 years  98.19  95.76  98.18 
Annualized  14.66  14.38  14.66 
10 years  88.92  84.24  95.72 
Annualized  6.57  6.30  6.95 
Life  185.50  173.45  210.77 
Annualized  5.92  5.67  6.41 

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

* Recent performance may have benefited from one or more legal settlements.

† Class inception date: September 30, 1998.


The S&P 500 Index is an unmanaged index of common stock performance.

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. Cash 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, the use of different classifications of securities for presentation purposes, and rounding. Holdings and allocations may vary over time.

Putnam VT Research Fund   1 

 


Report from your fund’s managers

Aaron, how would you describe the market environment during the 12-month reporting period ended December 31, 2016?

As 2016 began, the markets, which were growing increasingly alarmed by perceived economic weakness in China and serially depressed commodities prices, became anxious that the Federal Reserve had committed itself to a tightening policy agenda. These factors contributed to a risk-averse attitude on the part of many investors until roughly mid-February, at which point the markets began to stage a turnaround based on a variety of factors, including a rebounding oil price, decent U.S. economic data, declining stock market volatility, and a growing sense that the Fed would take a more gradual approach to raising interest rates.

As the period wore on, we began to see the bubbling up of inflationary pressures, including wage inflation as the labor market matured and commodity inflation as, for example, the price of oil rose off its February lows. Just prior to the U.S. presidential election, moreover, we saw the market shift its focus from dividend-paying stocks to sectors that could be beneficiaries of a reflationary macroeconomic trend, including riskier-seeming sectors such as financials, industrials, and natural resources. In the last few weeks of the period, technology stocks, interestingly, lost some of their luster with investors as they began to feel comfortable seeking growth in other areas of the market.

In the wake of the U.S. presidential election, equity performance soared in anticipation of a new business-friendly administration. Led by energy, financials, and telecommunications, most non-defensive sectors turned in double-digit returns during the final calendar quarter of 2016, while major U.S. equity indexes hit record highs and delivered solid positive returns for the year overall.

In this context, how did Putnam VT Research Fund perform?

The fund had a difficult first half, but performance improved markedly in the second half. Although it modestly underperformed its benchmark, the S&P 500 Index, for the year, we think the fund is well positioned to benefit from some of the regulatory and fiscal changes that may occur under a Trump administration.

Within different sectors, how would you characterize the fund’s positioning during the reporting period?

Within a variety of sectors, Putnam VT Research Fund has been positioned with a modestly pro-cyclical bias, which means that some parts of the portfolio were positioned to perform in line with the overall economy. In financials, for example, the fund was biased toward more interest-rate-sensitive stocks, which we thought would benefit if interest rates should rise. In natural resources, the fund had a pro-cyclical tilt as well, and we believed this would offer characteristics of relative strength as the changeover in Washington occurs. The fund’s industrials-focused exposure, by contrast, was biased toward U.S. defense stocks, which is not a pro-cyclical type of exposure.

How would you describe U.S. corporate health at period-end?

U.S. corporations generally may have turned a corner in the latter months of the period. A telling signal in this regard can be seen in corporate earnings growth in the third calendar quarter. At 3% for the market overall — and 6% when you bracket the weaker-performing energy sector — this was the first time in four consecutive quarters that earnings growth was positive. When we consider corporate prospects for 2017, we expect that continued solid underlying growth in the U.S. economy, augmented by generally higher energy prices than we saw at the start of 2016, could lead to double-digit earnings growth for the U.S. market overall.

What is your outlook for U.S. stocks?

We are optimistic about a number of business-building initiatives that President Trump has claimed will be priorities under his administration. At this early stage, we think it is likely that U.S. consumers will benefit from tax reform, and we also expect to see some measure of infrastructure spending get under way. We also believe that a number of promised reductions in regulatory burdens could give a boost to several areas, most notably financials. Overall, we think the regime change from President Obama to President Trump will shift the market in favor of sectors that may stand to benefit from pro-growth policies, higher interest rates, and inflationary conditions.

Accordingly, we expect long-term interest rates will rise and that the Fed may be in a position of responding to inflationary pressures by raising short-term interest rates. In our view, this economic and monetary policy environment stands a good chance of being positive for stock markets.

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: Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. Stock prices may fall or fail to rise over time for several reasons, including general financial market conditions and factors related to a specific company or industry. You can lose money by investing in the fund.

Your fund’s managers


Portfolio Manager Aaron M. Cooper, CFA, is Chief Investment Officer, Equities, at Putnam. He joined Putnam in 2011 and has been in the investment industry since 1999.

In addition to Aaron, your fund’s managers are Jacquelyne J. Cavanaugh; Samuel Cox; Neil P. Desai; Kathryn B. Lakin; and Walter D. Scully, CPA.

Your fund’s managers 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 Research 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 two left-hand columns of the Expenses per $1,000 table show the expenses you would have paid on a $1,000 investment in your fund from 7/1/16 to 12/31/16. 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 Expenses per $1,000 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.

Expense ratios

  Class IA  Class IB 
Total annual operating expenses for the fiscal     
year ended 12/31/15  0.81%  1.06% 
Annualized expense ratio for the six-month     
period ended 12/31/16*  0.83%  1.08% 

Fiscal-year expense information in this table is taken from the most recent prospectus, is subject to change, and may differ from that shown for the annualized expense ratio and in the financial highlights of this report.

Expenses are shown as a percentage of average net assets.

*For the fund’s most recent fiscal half year; may differ from expense ratios based on one-year data in the financial highlights.

Expenses per $1,000

      Expenses and value for a 
  Expenses and value for a  $1,000 investment, assuming 
  $1,000 investment, assuming  a hypothetical 5% annualized 
  actual returns for the  return for the 6 months 
  6 months ended 12/31/16  ended 12/31/16   
  Class IA  Class IB  Class IA  Class IB 
Expenses paid         
per $1,000*†  $4.34  $5.65  $4.22  $5.48 
Ending value         
(after         
expenses)  $1,081.10  $1,079.60  $1,020.96  $1,019.71 

*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 12/31/16. 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 Research Fund   3 

 


Report of Independent Registered Public Accounting Firm

To the Trustees of Putnam Variable Trust and Shareholders of
Putnam VT Research Fund:

In our opinion, the accompanying statement of assets and liabilities, including the portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Putnam VT Research Fund (the “Fund”) as of December 31, 2016, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments as of December 31, 2016 by correspondence with the custodian, brokers, transfer agent, and the application of alternative auditing procedures where securities purchased had not been received, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2017

4   Putnam VT Research Fund 

 


The fund’s portfolio 12/31/16

COMMON STOCKS (98.4%)*   Shares   Value 
 
Aerospace and defense (2.7%)     
Airbus SE (France)   4,040   $266,634 
Northrop Grumman Corp.   1,550   360,499 
Raytheon Co.   2,522   358,124 
United Technologies Corp.   2,494   273,392 
    1,258,649 
Air freight and logistics (0.4%)     
United Parcel Service, Inc. Class B   1,533   175,743 
    175,743 
Airlines (0.6%)     
American Airlines Group, Inc.   2,792   130,358 
United Continental Holdings, Inc. †   1,803   131,403 
    261,761 
Banks (6.8%)     
Bank of America Corp.   42,238   933,460 
JPMorgan Chase & Co.   11,518   993,888 
KeyCorp   19,082   348,628 
Wells Fargo & Co.   16,280   897,191 
    3,173,167 
Beverages (3.6%)     
Dr. Pepper Snapple Group, Inc.   4,189   379,817 
Molson Coors Brewing Co. Class B   3,207   312,073 
Monster Beverage Corp. †   1,183   52,454 
PepsiCo, Inc.   9,041   945,960 
    1,690,304 
Biotechnology (3.6%)     
Amgen, Inc.   2,796   408,803 
Biogen, Inc. †   1,121   317,893 
Celgene Corp. †   4,455   515,666 
Gilead Sciences, Inc.   6,094   436,391 
    1,678,753 
Building products (1.0%)     
CaesarStone Sdot-Yam, Ltd. (Israel) †   872   24,983 
Johnson Controls International PLC   10,553   434,678 
    459,661 
Capital markets (3.2%)     
AllianceBernstein Holding LP   6,328   148,392 
Ameriprise Financial, Inc.   1,381   153,208 
Charles Schwab Corp. (The)   8,733   344,692 
Goldman Sachs Group, Inc. (The)   1,967   470,998 
Intercontinental Exchange, Inc.   358   20,198 
Invesco, Ltd.   3,621   109,861 
KKR & Co. LP   16,932   260,583 
    1,507,932 
Chemicals (2.5%)     
Air Products & Chemicals, Inc.   599   86,148 
Albemarle Corp.   1,405   120,942 
Axalta Coating Systems, Ltd. †   1,794   48,797 
CF Industries Holdings, Inc.   4,047   127,400 
Dow Chemical Co. (The)   1,973   112,895 
LANXESS AG (Germany)   938   61,460 
Sherwin-Williams Co. (The)   1,253   336,731 
Sociedad Quimica y Minera de Chile SA ADR (Chile)   775   22,204 
Syngenta AG (Switzerland)   358   141,475 
W.R. Grace & Co.   1,206   81,574 
Yara International ASA (Norway)   275   10,829 
    1,150,455 

 

COMMON STOCKS (98.4%)* cont.   Shares   Value 
Commercial services and supplies (1.0%)     
Rollins, Inc.   5,778   $195,181 
Stericycle, Inc. †   861   66,331 
Waste Connections, Inc. (Canada)   2,324   182,643 
    444,155 
Communications equipment (0.4%)     
Cisco Systems, Inc.   6,044   182,650 
    182,650 
Construction materials (0.3%)     
Martin Marietta Materials, Inc.   281   62,250 
Vulcan Materials Co.   537   67,206 
    129,456 
Consumer finance (1.1%)     
Oportun Financial Corp. (acquired 6/23/15,     
cost $24,222) (Private) †ΔΔ F   8,499   21,800 
Synchrony Financial   13,355   484,386 
    506,186 
Containers and packaging (0.4%)     
Ball Corp.   930   69,815 
RPC Group PLC (United Kingdom)   3,383   44,259 
Sealed Air Corp.   2,004   90,861 
    204,935 
Distributors (0.1%)     
LKQ Corp. †   1,495   45,822 
    45,822 
Diversified consumer services (0.6%)     
Bright Horizons Family Solutions, Inc. †   1,365   95,577 
Service Corp. International/US   5,683   161,397 
    256,974 
Diversified financial services (0.1%)     
Berkshire Hathaway, Inc. Class B †   160   26,077 
Conyers Park Acquisition Corp. (Units) †   3,870   41,990 
    68,067 
Diversified telecommunication services (1.9%)     
AT&T, Inc.   16,427   698,640 
Zayo Group Holdings, Inc. †   5,156   169,426 
    868,066 
Electric utilities (1.8%)     
American Electric Power Co., Inc.   1,549   97,525 
Edison International   1,965   141,460 
Exelon Corp.   7,378   261,845 
NextEra Energy, Inc.   1,148   137,140 
PG&E Corp.   3,524   214,153 
    852,123 
Energy equipment and services (1.5%)     
Baker Hughes, Inc.   1,124   73,026 
Halliburton Co.   5,804   313,938 
Schlumberger, Ltd.   3,445   289,208 
    676,172 
Equity real estate investment trusts (REITs) (2.9%)     
American Tower Corp.   1,784   188,533 
AvalonBay Communities, Inc.   707   125,245 
Boston Properties, Inc.   929   116,850 
Douglas Emmett, Inc.   1,078   39,412 
Equinix, Inc.   354   126,523 
Equity Lifestyle Properties, Inc.   893   64,385 
Essex Property Trust, Inc.   216   50,220 
Federal Realty Investment Trust   413   58,691 
Gaming and Leisure Properties, Inc.   2,736   83,776 
General Growth Properties   3,098   77,388 
Kimco Realty Corp.   974   24,506 
Pebblebrook Hotel Trust   1,023   30,434 
Public Storage   505   112,868 

 

Putnam VT Research Fund   5 

 


COMMON STOCKS (98.4%)* cont.   Shares   Value 
 
Equity real estate investment trusts (REITs) cont.     
Simon Property Group, Inc.   708   $125,790 
Ventas, Inc.   1,633   102,095 
    1,326,716 
Food and staples retail (2.8%)     
Costco Wholesale Corp.   2,091   334,790 
CVS Health Corp.   2,522   199,011 
Kroger Co. (The)   5,124   176,829 
Wal-Mart Stores, Inc.   2,132   147,364 
Walgreens Boots Alliance, Inc.   5,114   423,235 
    1,281,229 
Food products (1.6%)     
JM Smucker Co. (The)   2,091   267,773 
Kraft Heinz Co. (The)   3,610   315,225 
Mead Johnson Nutrition Co.   1,110   78,544 
Nomad Foods, Ltd. (United Kingdom) †   3,684   35,256 
Pinnacle Foods, Inc.   688   36,774 
    733,572 
Health-care equipment and supplies (2.4%)     
Abbott Laboratories   1,746   67,064 
Becton Dickinson and Co.   1,197   198,163 
Boston Scientific Corp. †   7,044   152,362 
C.R. Bard, Inc.   742   166,698 
Danaher Corp.   3,421   266,291 
Edwards Lifesciences Corp. †   270   25,299 
Intuitive Surgical, Inc. †   233   147,762 
Medtronic PLC   1,324   94,309 
    1,117,948 
Health-care providers and services (0.9%)     
Aetna, Inc.   348   43,155 
Cardinal Health, Inc.   237   17,057 
Cigna Corp.   266   35,482 
Express Scripts Holding Co. †   1,193   82,066 
Henry Schein, Inc. †   388   58,863 
Humana, Inc.   703   143,433 
UnitedHealth Group, Inc.   329   52,653 
    432,709 
Health-care technology (0.1%)     
Castlight Health, Inc. Class B † S   5,142   25,453 
HTG Molecular Diagnostics, Inc. †   407   912 
    26,365 
Hotels, restaurants, and leisure (1.1%)     
Hilton Worldwide Holdings, Inc.   6,625   180,200 
Penn National Gaming, Inc. †   9,026   124,469 
Restaurant Brands International, Inc. (Canada)   1,320   62,911 
Wynn Resorts, Ltd. S   1,195   103,379 
Yum China Holdings, Inc. (China) †   1,976   51,613 
    522,572 
Household products (0.6%)     
Colgate-Palmolive Co.   3,951   258,553 
    258,553 
Independent power and renewable electricity producers (0.6%)   
Calpine Corp. †   10,553   120,621 
NRG Energy, Inc.   13,378   164,014 
    284,635 
Industrial conglomerates (0.8%)     
Siemens AG (Germany)   2,976   365,816 
    365,816 
Insurance (3.5%)     
American International Group, Inc.   6,889   449,921 
Assured Guaranty, Ltd.   7,457   281,651 
Chubb, Ltd.   2,399   316,956 
Hartford Financial Services Group, Inc. (The)   3,856   183,738 

 

COMMON STOCKS (98.4%)* cont.   Shares   Value 
 
Insurance cont.     
MetLife, Inc.   3,387   $182,525 
Prudential PLC (United Kingdom)   11,628   231,934 
    1,646,725 
Internet and direct marketing retail (3.1%)     
Amazon.com, Inc. †   1,246   934,338 
Ctrip.com International, Ltd. ADR (China) † S   3,437   137,480 
Delivery Hero Holding GmbH (acquired 6/12/15,     
cost $30,808) (Private) (Germany) †ΔΔ F   4   25,935 
Expedia, Inc.   729   82,581 
Priceline Group, Inc. (The) †   177   259,493 
    1,439,827 
Internet software and services (5.4%)     
Alibaba Group Holding, Ltd. ADR (China) † S   1,863   163,590 
Alphabet, Inc. Class A †   1,623   1,286,148 
Criteo SA ADR (France) †   1,179   48,433 
Facebook, Inc. Class A †   6,577   756,684 
GoDaddy, Inc. Class A † S   2,218   77,519 
Tencent Holdings, Ltd. (China)   4,050   98,294 
Wix.com, Ltd. (Israel) †   1,267   56,445 
    2,487,113 
IT Services (2.5%)     
Cognizant Technology Solutions Corp. Class A †   814   45,608 
Computer Sciences Corp.   2,866   170,298 
Fidelity National Information Services, Inc.   2,634   199,236 
MasterCard, Inc. Class A   2,473   255,337 
Visa, Inc. Class A   6,234   486,377 
    1,156,856 
Leisure products (0.1%)     
Brunswick Corp.   1,258   68,611 
    68,611 
Life sciences tools and services (0.4%)     
Agilent Technologies, Inc.   3,390   154,448 
Illumina, Inc. †   359   45,966 
    200,414 
Machinery (1.8%)     
Dover Corp.   2,365   177,209 
Fortive Corp.   4,922   263,967 
KION Group AG (Germany)   2,494   138,607 
Komatsu, Ltd. (Japan)   12,000   270,854 
    850,637 
Media (3.8%)     
Charter Communications, Inc. Class A †   1,360   391,571 
Comcast Corp. Class A   7,535   520,292 
DISH Network Corp. Class A †   1,816   105,201 
Live Nation Entertainment, Inc. †   5,386   143,268 
Time Warner, Inc.   954   92,090 
Walt Disney Co. (The)   5,049   526,207 
    1,778,629 
Metals and mining (0.4%)     
ArcelorMittal SA (France) †   3,236   23,858 
Barrick Gold Corp. (Canada)   775   12,385 
Freeport-McMoRan, Inc. (Indonesia) †   1,445   19,060 
Newmont Mining Corp.   1,395   47,528 
Nucor Corp.   692   41,188 
Steel Dynamics, Inc.   314   11,172 
United States Steel Corp.   463   15,284 
    170,475 
Multi-utilities (0.3%)     
Ameren Corp.   1,697   89,025 
Sempra Energy   610   61,390 
    150,415 

 

6   Putnam VT Research Fund 

 


COMMON STOCKS (98.4%)* cont.   Shares   Value 
 
Oil, gas, and consumable fuels (6.6%)     
Anadarko Petroleum Corp.   5,748   $400,808 
Arch Coal, Inc. Class A †   108   8,429 
Cenovus Energy, Inc. (Canada)   9,419   142,409 
Cheniere Energy, Inc. †   4,223   174,959 
Chevron Corp.   1,256   147,831 
Cimarex Energy Co.   268   36,421 
ConocoPhillips   8,518   427,093 
Devon Energy Corp.   773   35,303 
EnCana Corp. (Canada)   6,019   70,651 
EOG Resources, Inc.   2,474   250,121 
Exxon Mobil Corp.   1,616   145,860 
Hess Corp.   585   36,440 
Kinder Morgan, Inc.   2,622   54,302 
Marathon Oil Corp.   4,028   69,725 
Noble Energy, Inc.   3,591   136,673 
ONEOK, Inc.   509   29,222 
Pioneer Natural Resources Co.   784   141,175 
Plains All American Pipeline LP   2,848   91,962 
Royal Dutch Shell PLC Class A (United Kingdom)   10,991   302,854 
Seven Generations Energy, Ltd. (Canada) †   3,239   75,532 
Suncor Energy, Inc. (Canada)   6,744   220,505 
Williams Cos., Inc. (The)   1,261   39,268 
    3,037,543 
Paper and forest products (—%)     
KapStone Paper and Packaging Corp.   570   12,569 
    12,569 
Personal products (0.4%)     
Coty, Inc. Class A   7,074   129,525 
Edgewell Personal Care Co. †   750   54,743 
    184,268 
Pharmaceuticals (4.4%)     
Allergan PLC †   2,296   482,183 
Bristol-Myers Squibb Co.   3,951   230,896 
Eli Lilly & Co.   3,425   251,909 
Jazz Pharmaceuticals PLC †   404   44,048 
Johnson & Johnson   1,745   201,041 
Merck & Co., Inc.   5,822   342,741 
Mylan NV †   3,467   132,266 
Pfizer, Inc.   11,276   366,244 
    2,051,328 
Real estate management and development (0.3%)     
CBRE Group, Inc. Class A †   1,278   40,244 
RE/MAX Holdings, Inc. Class A   1,868   104,608 
    144,852 
Road and rail (0.7%)     
Norfolk Southern Corp.   1,663   179,720 
Union Pacific Corp.   1,288   133,540 
    313,260 
Semiconductors and semiconductor equipment (4.5%)   
Analog Devices, Inc.   756   54,901 
Applied Materials, Inc.   9,006   290,624 
Broadcom, Ltd.   1,717   303,514 
Micron Technology, Inc. †   4,586   100,525 
NVIDIA Corp.   717   76,533 
NXP Semiconductor NV †   1,215   119,082 
Qorvo, Inc. †   5,962   314,376 
QUALCOMM, Inc.   2,035   132,682 
Skyworks Solutions, Inc.   1,540   114,976 
Sumco Corp. (Japan)   3,400   43,682 

 

COMMON STOCKS (98.4%)* cont.   Shares   Value 
 
Semiconductors and semiconductor equipment cont.   
Texas Instruments, Inc.   4,781   $348,870 
Xilinx, Inc.   3,004   181,351 
    2,081,116 
Software (4.7%)     
Activision Blizzard, Inc.   429   15,491 
Adobe Systems, Inc. †   2,267   233,388 
Electronic Arts, Inc. †   2,978   234,547 
Everbridge, Inc. †   1,519   28,026 
Microsoft Corp.   22,787   1,415,984 
salesforce.com, Inc. †   2,675   183,131 
ServiceNow, Inc. †   715   53,153 
    2,163,720 
Specialty retail (2.2%)     
Five Below, Inc. † S   1,621   64,775 
Home Depot, Inc. (The)   3,528   473,034 
O’Reilly Automotive, Inc. †   761   211,870 
TJX Cos., Inc. (The)   3,585   269,341 
    1,019,020 
Technology hardware, storage, and peripherals (3.4%)   
Apple, Inc.   12,920   1,496,394 
HP, Inc.   3,961   58,781 
Western Digital Corp.   660   44,847 
    1,600,022 
Textiles, apparel, and luxury goods (0.4%)     
Hanesbrands, Inc.   8,434   181,921 
    181,921 
Tobacco (1.0%)     
Altria Group, Inc.   4,744   320,789 
Philip Morris International, Inc.   1,459   133,484 
    454,273 
Trading companies and distributors (0.3%)     
United Rentals, Inc. †   1,258   132,820 
    132,820 
Water utilities (0.3%)     
American Water Works Co., Inc.   2,105   152,318 
    152,318 
Wireless telecommunication services (0.5%)     
T-Mobile US, Inc. †   4,052   233,031 
    233,031 
Total common stocks (cost $40,517,126)     $45,652,909 
 
CONVERTIBLE PREFERRED STOCKS (0.2%)*   Shares   Value 
Oportun Financial Corp. Ser. A-1, 8.00% cv. pfd.     
(acquired 6/23/15, cost $66) (Private) †ΔΔ F   23   $59 
Oportun Financial Corp. Ser. B-1, 8.00% cv. pfd.     
(acquired 6/23/15, cost $1,266) (Private) †ΔΔ F   402   1,140 
Oportun Financial Corp. Ser. C-1, 8.00% cv. pfd.     
(acquired 6/23/15, cost $2,973) (Private) †ΔΔ F   584   2,675 
Oportun Financial Corp. Ser. D-1, 8.00% cv. pfd.     
(acquired 6/23/15, cost $4,311) (Private) †ΔΔ F   847   3,880 
Oportun Financial Corp. Ser. E-1, 8.00% cv. pfd.     
(acquired 6/23/15, cost $2,416) (Private) †ΔΔ F   440   2,174 
Oportun Financial Corp. Ser. F, 8.00% cv. pfd.     
(acquired 6/23/15, cost $7,296) (Private) †ΔΔ F   950   6,566 
Oportun Financial Corp. Ser. F-1, 8.00% cv. pfd.     
(acquired 6/23/15, cost $20,463) (Private) †ΔΔ F   7,180   18,417 
Oportun Financial Corp. Ser. G, 8.00% cv. pfd.     
(acquired 6/23/15, cost $25,875) (Private) †ΔΔ F   9,079   23,288 
Oportun Financial Corp. Ser. H, 8.00% cv. pfd.     
(acquired 2/6/15, cost $39,489) (Private) †ΔΔ F   13,869   35,540 
Total convertible preferred stocks (cost $104,155)     $93,739 

 

Putnam VT Research Fund   7 

 


PURCHASED OPTIONS  Expiration  Contract   
OUTSTANDING (—%)*   date/strike price   amount   Value 
SPDR S&P 500 ETF Trust (Put)   Feb-17/$200.00   $37,310   $18,846 
Total purchased options outstanding (cost $90,290)   $18,846 
 
SHORT-TERM INVESTMENTS (2.9%)*   Shares   Value 
Putnam Cash Collateral Pool, LLC 0.91% d   469,250   $469,250 
Putnam Short Term Investment Fund 0.69% L   771,330   771,330 
State Street Institutional U.S. Government Money     
Market Fund, Premier Class 0.42% P   110,000   110,000 
Total short-term investments (cost $1,350,580)   $1,350,580 
 
Total investments (cost $42,062,151)   $47,116,074 

 

Key to holding’s abbreviations 
 
ADR American Depository Receipts: represents ownership of foreign  
  securities on deposit with a custodian bank 
ETF Exchange Traded Fund  
OTC  Over-the-counter 
SPDR S&P Depository Receipts  

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, 2016 through December 31, 2016 (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 $46,399,167.

† This security is non-income-producing.

ΔΔ This security is restricted with regard to public resale. The total fair value of this security and any other restricted securities (excluding 144A securities), if any, held at the close of the reporting period was $141,474, or 0.3% of net assets.

d Affiliated company. See Notes 1 and 5 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.

F This security is valued by Putnam Management at fair value following procedures approved by the Trustees. Securities may be classified as Level 2 or Level 3 for ASC 820 based on the securities’ valuation inputs. At the close of the reporting period, fair value pricing was also used for certain foreign securities in the portfolio (Note 1).

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.

P This security was pledged, or purchased with cash that was pledged, to the fund for collateral on certain derivative contracts. The rate quoted in the security description is the annualized 7-day yield of the fund at the close of the reporting period (Note 1).

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

At the close of the reporting period, the fund maintained liquid assets totaling $1,303 to cover certain derivative contracts.

FORWARD CURRENCY CONTRACTS at 12/31/16 (aggregate face value $2,831,595)

            Unrealized 
    Contract  Delivery    Aggregate   appreciation/ 
Counterparty  Currency  type  date  Value   face value   (depreciation) 
Bank of America N.A.             
  British Pound  Sell  3/16/17  $127,407  $126,348  $(1,059) 
  Canadian Dollar  Sell  1/18/17  4,321  4,420  99 
Citibank, N.A.             
  Euro  Sell  3/16/17  911,023  918,310  7,287 
Goldman Sachs International             
  Japanese Yen  Sell  2/16/17  322,076  342,546  20,470 
JPMorgan Chase Bank N.A.             
  British Pound  Sell  3/16/17  433,827  445,799  11,972 
  Canadian Dollar  Sell  1/18/17  709,183  722,714  13,531 
  Norwegian Krone  Buy  3/16/17  1,170  1,201  (31) 
  Swiss Franc  Sell  3/16/17  127,049  128,381  1,332 
State Street Bank and Trust Co.             
  Israeli Shekel  Sell  1/18/17  138,332  141,876  3,544 
Total            $57,145 

 

WRITTEN OPTIONS  Expiration     
OUTSTANDING at 12/31/16  date/strike  Contract   
(premiums $67,158)  price  amount  Value 
 
SPDR S&P 500 ETF Trust (Put)  Feb-17/$195.00  $37,310  $12,688 
Total      $12,688 

 

OTC TOTAL RETURN SWAP CONTRACTS OUTSTANDING at 12/31/16       
    Upfront    Payments  Total return  Unrealized 
Swap counterparty/  premium  Termination  received (paid) by  received by or  appreciation/ 
Notional amount  received (paid)  date  fund per annum  paid by fund  (depreciation) 
Goldman Sachs International           
units  156  $—  12/15/20  1 month  Russell 2000 Total  $6,088 
        USD-LIBOR-BBA minus  Return Index   
        0.58%     
Total    $—        $6,088 

 

8   Putnam VT Research Fund 

 


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  $5,287,441  $—­  $25,935 
Consumer staples  4,602,199  —­  —­ 
Energy  3,410,861  302,854  —­ 
Financials  6,648,343  231,934  21,800 
Health care  5,507,517  —­  —­ 
Industrials  3,220,591  1,041,911  —­ 
Information technology  9,529,501  141,976  —­ 
Materials  1,386,009  281,881  —­ 
Real Estate  1,471,568  —­  —­ 
Telecommunication services  1,101,097  —­  —­ 
Utilities  1,439,491  —­  —­ 
Total common stocks  43,604,618  2,000,556  47,735 
Convertible preferred stocks  —­  —­  93,739 
Purchased options outstanding  —­  18,846  —­ 
Short-term investments  881,330  469,250  —­ 
Totals by level  $44,485,948  $2,488,652  $141,474 
 
    Valuation inputs   
Other financial instruments:  Level 1  Level 2  Level 3 
Forward currency contracts  $—­  $57,145  $—­ 
Written options outstanding  —­  (12,688)  —­ 
Total return swap contracts  —­  6,088  —­ 
Totals by level  $—­  $50,545  $—­ 

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

During the reporting period, transfers within the fair value hierarchy, if any (other than certain transfers involving non-U.S. equity securities as described in Note 1), did not represent, in the aggregate, more than 1% of the fund’s net assets measured as of the end of the period. Transfers are accounted for using the end of period pricing valuation method.

At the start and close of the reporting period, Level 3 investments in securities represented less than 1% of the fund’s net assets and were not considered a significant portion of the fund’s portfolio.

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

Putnam VT Research Fund   9 

 


Statement of assets and liabilities
12/31/16

Assets   
Investment in securities, at value, including $459,434 of securities on loan (Note 1):   
Unaffiliated issuers (identified cost $40,821,571)  $45,875,494 
Affiliated issuers (identified cost $1,240,580) (Notes 1 and 5)  1,240,580 
Foreign currency (cost $605) (Note 1)  605 
Dividends, interest and other receivables  77,645 
Receivable for shares of the fund sold  7,655 
Receivable for investments sold  49,400 
Unrealized appreciation on forward currency contracts (Note 1)  58,235 
Unrealized appreciation on OTC swap contracts (Note 1)  6,088 
Total assets  47,315,702 
 
Liabilities   
Payable for investments purchased  14,012 
Payable for shares of the fund repurchased  143,214 
Payable for compensation of Manager (Note 2)  22,097 
Payable for custodian fees (Note 2)  17,633 
Payable for investor servicing fees (Note 2)  7,629 
Payable for Trustee compensation and expenses (Note 2)  63,994 
Payable for administrative services (Note 2)  480 
Payable for distribution fees (Note 2)  5,529 
Unrealized depreciation on forward currency contracts (Note 1)  1,090 
Written options outstanding, at value (premiums $67,158) (Notes 1 and 3)  12,688 
Collateral on securities loaned, at value (Note 1)  469,250 
Collateral on certain derivative contracts, at value (Note 1)  110,000 
Other accrued expenses  48,919 
Total liabilities  916,535 
 
Net assets  $46,399,167 
 
Represented by   
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4)  $50,613,687 
Undistributed net investment income (Note 1)  217,892 
Accumulated net realized loss on investments and foreign currency transactions (Note 1)  (9,604,018) 
Net unrealized appreciation of investments and assets and liabilities in foreign currencies  5,171,606 
Total — Representing net assets applicable to capital shares outstanding  $46,399,167 
 
Computation of net asset value Class IA   
Net assets  $20,597,325 
Number of shares outstanding  941,681 
Net asset value, offering price and redemption price per share (net assets divided by number of shares outstanding)  $21.87 
Computation of net asset value Class IB   
Net assets  $25,801,842 
Number of shares outstanding  1,181,829 
Net asset value, offering price and redemption price per share (net assets divided by number of shares outstanding)  $21.83 

 

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

10   Putnam VT Research Fund 

 


Statement of operations

Year ended 12/31/16

Investment income   
Dividends (net of foreign tax of $4,523)  $863,800 
Interest (including interest income of $5,494 from investments in affiliated issuers) (Note 5)  5,886 
Securities lending (net of expenses) (Notes 1 and 5)  8,459 
Total investment income  878,145 
 
Expenses   
Compensation of Manager (Note 2)  254,574 
Investor servicing fees (Note 2)  32,042 
Custodian fees (Note 2)  23,845 
Trustee compensation and expenses (Note 2)  3,576 
Distribution fees (Note 2)  64,386 
Administrative services (Note 2)  1,352 
Auditing and tax fees  35,265 
Other  26,921 
Fees waived and reimbursed by Manager (Note 2)  (644) 
Total expenses  441,317 
 
Expense reduction (Note 2)  (2,461) 
Net expenses  438,856 
 
Net investment income  439,289 
 
Net realized gain on investments (Notes 1 and 3)  1,868,883 
Net realized loss on swap contracts (Note 1)  (217,290) 
Net realized gain on foreign currency transactions (Note 1)  99,499 
Net realized gain on written options (Notes 1 and 3)  99,002 
Net unrealized appreciation of assets and liabilities in foreign currencies during the year  25,000 
Net unrealized appreciation of investments, swap contracts and written options during the year  2,110,374 
Net gain on investments  3,985,468 
 
Net increase in net assets resulting from operations  $4,424,757 

 

Statement of changes in net assets

  Year ended  Year ended 
  12/31/16  12/31/15 
Decrease in net assets     
Operations     
Net investment income  $439,289  $437,281 
Net realized gain on investments and foreign currency transactions  1,850,094  4,934,658 
Net unrealized appreciation (depreciation) of investments and assets and liabilities in foreign currencies  2,135,374  (5,960,657) 
Net increase (decrease) in net assets resulting from operations  4,424,757  (588,718) 
Distributions to shareholders (Note 1):     
From ordinary income     
Net investment income     
Class IA  (364,775)  (354,687) 
Class IB  (399,283)  (382,705) 
Decrease from capital share transactions (Note 4)  (4,894,321)  (6,771,754) 
Total decrease in net assets  (1,233,622)  (8,097,864) 
Net assets     
Beginning of year  47,632,789  55,730,653 
End of year (including undistributed net investment income of $217,892 and $698,993, respectively)  $46,399,167  $47,632,789 

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

Putnam VT Research Fund   11 

 


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 a Net investment income (loss) Net realized and unrealized gain (loss) on investments Total from investment operations From net investment income Total distributions 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                         
12/31/16­  $20.19­  .22­  1.83­  2.05­  (.37)  (.37)  $21.87­  10.32­  $20,597­  .82 e  1.10 e  80­ 
12/31/15­  20.76­  .20­  (.45)  (.25)  (.32)  (.32)  20.19­  (1.29)  20,684­  .81­  .98­  90­ 
12/31/14­  18.22­  .21­  2.53­  2.74­  (.20)  (.20)  20.76­  15.17­  24,359­  .83­  1.11­  94­ 
12/31/13­  13.83­  .17­  4.43­  4.60­  (.21)  (.21)  18.22­  33.60­  25,321­  .82­  1.08­  90­ 
12/31/12­  11.84­  .19­  1.97­  2.16­  (.17)  (.17)  13.83­  18.28­  23,099­  .85­  1.42­  89­ 
Class IB­                         
12/31/16­  $20.15­  .17­  1.82­  1.99­  (.31)  (.31)  $21.83­  10.03­  $25,802­  1.07 e  .85 e  80­ 
12/31/15­  20.71­  .15­  (.45)  (.30)  (.26)  (.26)  20.15­  (1.50)  26,949­  1.06­  .73­  90­ 
12/31/14­  18.18­  .17­  2.51­  2.68­  (.15)  (.15)  20.71­  14.86­  31,372­  1.08­  .87­  94­ 
12/31/13­  13.79­  .13­  4.43­  4.56­  (.17)  (.17)  18.18­  33.36­  32,988­  1.07­  .83­  90­ 
12/31/12­  11.81­  .15­  1.96­  2.11­  (.13)  (.13)  13.79­  17.92­  30,009­  1.10­  1.16­  89­ 

a Per share net investment income (loss) has been determined on the basis of the 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/or brokerage/service arrangements, if any (Note 2). Also excludes acquired fund fees and expenses, if any.

e Reflects a voluntary waiver of certain fund expenses in effect during the period. As a result of such waiver, the expenses of each class reflect a reduction of less than 0.01% as a percentage of average net assets (Note 2).

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

12   Putnam VT Research Fund 

 


Notes to financial statements 12/31/16

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, 2016 through December 31, 2016.

Putnam VT Research 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 goal of the fund is to seek capital appreciation. The fund invests mainly in common stocks (growth or value stocks or both) of large U.S. companies that Putnam Management believes have favorable investment potential. For example, the fund may purchase stocks of companies with stock prices that reflect a value lower than that which Putnam Management places on the company. Putnam Management may also consider other factors that Putnam Management believes will cause the stock price to rise and 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 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.

The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent and custodian, who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.

Under the fund’s Declaration of Trust, any claims asserted against or on behalf of the Putnam Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.

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 Portfolio securities and other investments are valued using policies and procedures adopted by the Board of Trustees. The Trustees have formed a Pricing Committee to oversee the implementation of these procedures and have delegated responsibility for valuing the fund’s assets in accordance with these procedures to Putnam Management. Putnam Management has established an internal Valuation Committee that is responsible for making fair value determinations, evaluating the effectiveness of the pricing policies of the fund and reporting to the Pricing Committee.

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 scheduled 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 scheduled close of the New York Stock Exchange. Accordingly, on certain days, the fund will fair value certain 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. The foreign equity 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. At the close of the reporting period, fair value pricing was used for certain foreign securities in the portfolio. 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 are valued using an independent pricing service approved by the Trustees, 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, recovery rates, sales and other multiples and resale restrictions. These securities are classified as Level 2 or as Level 3 depending on the priority of the significant inputs.

To assess the continuing appropriateness of fair valuations, the Valuation Committee reviews and affirms the reasonableness of such valuations on a regular basis after considering all relevant information that is reasonably available. 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.

Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The fair value of foreign securities, currency holdings, and other assets and liabilities is recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of

Putnam VT Research Fund   13 

 


each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when earned or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net realized exchange gains or losses on closed forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the fund’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate.

Options contracts The fund uses options contracts to hedge against changes in values of securities it owns, owned or expects to own and to manage downside risks.

The potential risk to the fund is that the change in value of options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contracts, if interest or exchange rates move unexpectedly or if the counterparty to the contract is unable to perform. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments.

Exchange-traded options are valued at the last sale price or, if no sales are reported, the last bid price for purchased options and the last ask price for written options. OTC traded options are valued using prices supplied by dealers.

Options on swaps are similar to options on securities except that the premium paid or received is to buy or grant the right to enter into a previously agreed upon interest rate or credit default contract. Forward premium swap option contracts include premiums that have extended settlement dates. The delayed settlement of the premiums is factored into the daily valuation of the option contracts. In the case of interest rate cap and floor contracts, in return for a premium, ongoing payments between two parties are based on interest rates exceeding a specified rate, in the case of a cap contract, or falling below a specified rate in the case of a floor contract.

Written option contracts outstanding at period end, if any, are listed after the fund’s portfolio.

Forward currency contracts The fund buys and sells forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date. These contracts are used to hedge foreign exchange risk.

The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The fair value of the contract will fluctuate with changes in currency exchange rates. The contract is marked to market daily and the change in fair value is recorded as an unrealized gain or loss. The fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed when the contract matures or by delivery of the currency. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. Risks may exceed amounts recognized on the Statement of assets and liabilities.

Forward currency contracts outstanding at period end, if any, are listed after the fund’s portfolio.

Total return swap contracts The fund entered into OTC total return swap contracts, which are arrangements to exchange a market-linked return for a periodic payment, both based on a notional principal amount, to gain exposure to a basket of securities.

To the extent that the total return of the security, index or other financial measure underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the fund will receive a payment from or make a payment to the counterparty. OTC total return swap contracts are marked to market daily based upon quotations from an independent pricing service or market makers and the change, if any, is recorded as an unrealized gain or loss. Payments received or made are recorded as realized gains or losses. Certain OTC total return swap contracts may

include extended effective dates. Payments related to these swap contracts are accrued based on the terms of the contract. The fund could be exposed to credit or market risk due to unfavorable changes in the fluctuation of interest rates or in the price of the underlying security or index, the possibility that there is no liquid market for these agreements or that the counterparty may default on its obligation to perform. The fund’s maximum risk of loss from counterparty risk is the fair value of the contract. This risk may be mitigated by having a master netting arrangement between the fund and the counterparty. Risk of loss may exceed amounts recognized on the Statement of assets and liabilities.

OTC total return swap contracts outstanding, including their respective notional amounts at period end, if any, are listed after the fund’s portfolio.

Master agreements The fund is a party to ISDA (International Swaps and Derivatives Association, Inc.) Master Agreements (Master Agreements) with certain counterparties that govern OTC derivative and foreign exchange contracts entered into from time to time. The Master Agreements may contain provisions regarding, among other things, the parties’ general obligations, representations, agreements, collateral requirements, events of default and early termination. With respect to certain counterparties, in accordance with the terms of the Master Agreements, collateral posted to the fund is held in a segregated account by the fund’s custodian and, with respect to those amounts which can be sold or repledged, is presented in the fund’s portfolio.

Collateral pledged by the fund is segregated by the fund’s custodian and identified in the fund’s portfolio. Collateral can be in the form of cash or debt securities issued by the U.S. Government or related agencies or other securities as agreed to by the fund and the applicable counterparty. Collateral requirements are determined based on the fund’s net position with each counterparty.

Termination events applicable to the fund may occur upon a decline in the fund’s net assets below a specified threshold over a certain period of time. Termination events applicable to counterparties may occur upon a decline in the counterparty’s long-term and short-term credit ratings below a specified level. In each case, upon occurrence, the other party may elect to terminate early and cause settlement of all derivative and foreign exchange contracts outstanding, including the payment of any losses and costs resulting from such early termination, as reasonably determined by the terminating party. Any decision by one or more of the fund’s counterparties to elect early termination could impact the fund’s future derivative activity.

At the close of the reporting period, the fund had a net liability position of $960 on open derivative contracts subject to the Master Agreements. There was no collateral posted by the fund at period end for these agreements.

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 remaining maturities of the securities lending transactions are considered overnight and continuous. 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, net of expenses, 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 $469,250 and the value of securities loaned amounted to $459,434.

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 $317.5 million unsecured committed line of credit and a $235.5 million unsecured 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 higher of (1) the Federal Funds rate and (2) the overnight LIBOR 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% of the committed line of credit plus a $25,000 flat fee and 0.04%

14   Putnam VT Research Fund 

 


of the uncommitted line of credit has been paid by the participating funds. In addition, a commitment fee of 0.21% 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.

The fund may also be subject to taxes imposed by governments of countries in which it invests. Such taxes are generally based on either income or gains earned or repatriated. The fund accrues and applies such taxes to net investment income, net realized gains and net unrealized gains as income and/or capital gains are earned. In some cases, the fund may be entitled to reclaim all or a portion of such taxes, and such reclaim amounts, if any, are reflected as an asset on the fund’s books. In many cases, however, the fund may not receive such amounts for an extended period of time, depending on the country of investment.

At December 31, 2016, the fund had a capital loss carryover of $9,470,861 available to the extent allowed by the Code to offset future net capital gain, if any. For any carryover, the amount of the carryover and that carryover’s expiration date is:

  Loss carryover  
Short-term  Long-term  Total  Expiration 
$9,470,861  N/A  $9,470,861  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.

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. These differences include temporary and/or permanent differences from losses on wash sale transactions, from foreign currency gains and losses, from income on swap contracts, from partnership income and from corporate action adjustments to basis and income. 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. At the close of the reporting period, the fund reclassified $156,332 to decrease undistributed net investment income, $632 to decrease paid-in capital and $156,964 to decrease accumulated net realized loss.

The tax basis components of distributable earnings and the federal tax cost as of the close of the reporting period were as follows:

Unrealized appreciation   $6,636,440 
Unrealized depreciation   (1,714,984) 
Net unrealized appreciation   4,921,456 
Undistributed ordinary income   281,124 
Capital loss carryforward   (9,470,861) 
Cost for federal income tax purposes   $42,194,618 

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 45.3% 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 all open-end mutual funds sponsored by Putnam Management (excluding net assets of funds that are invested in, or that are invested in by, other Putnam funds to the extent necessary to avoid “double counting” of those assets). 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. 

For the reporting period, the management fee represented an effective rate (excluding the impact from any expense waivers in effect) of 0.556% of the fund’s average net assets.

Putnam Management has contractually agreed, through April 30, 2018, 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 Management may from time to time voluntarily undertake to waive fees and/or reimburse certain fund expenses. Any such waiver or reimbursement would be voluntary and may be modified or discontinued by Putnam Management at any time without notice. For the reporting period, Putnam Management voluntarily waived $644.

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. PIL did not manage any portion of the assets of the fund during the reporting period. If Putnam Management were to engage the services of PIL, Putnam Management would pay 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 Putnam Advisory Company, LLC (PAC), an affiliate of Putnam Management, is authorized by the Trustees to manage a separate portion of the assets of the fund, as designated from time to time by Putnam Management or PIL. PAC did not manage any portion of the assets of the fund during the reporting period. If Putnam Management or PIL were to engage the services of PAC, Putnam Management or PIL, as applicable, would pay a quarterly sub-advisory fee to PAC for its services at the annual rate of 0.35% of the average net assets of the portion of the fund’s assets for which PAC is engaged as sub-adviser.

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 0.07% of the fund’s average daily net assets. During the reporting period, the expenses for each class of shares related to investor servicing fees were as follows:

Class IA   $14,019 
Class IB   18,023 
Total   $32,042 

 

Putnam VT Research Fund   15 

 


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 reduced by $8 under the expense offset arrangements and by $2,453 under the brokerage/service arrangements.

Each Independent Trustee of the fund receives an annual Trustee fee, of which $36, 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.

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. The expenses related to distribution fees during the reporting period are included in Distribution fees in the Statement of operations.

Note 3 — Purchases and sales of securities

During the reporting period, the cost of purchases and the proceeds from sales, excluding short-term investments, were as follows:

  Cost of  Proceeds 
  purchases  from sales 
Investments in securities     
(Long-term)  $35,868,938  $40,641,651 
U.S. government securities     
(Long-term)  —  — 
Total  $35,868,938  $40,641,651 

The fund may purchase or sell investments from or to other Putnam funds in the ordinary course of business, which can reduce the fund’s transaction costs, at prices determined in accordance with SEC requirements and policies approved by the Trustees. During the reporting period, purchases or sales of long-term securities from or to other Putnam funds, if any, did not represent more than 5% of the fund’s total cost of purchases and/or total proceeds from sales.

Written option transactions during the reporting period are summarized as follows:

  Written option  Written option 
  contract amounts  premiums 
Written options outstanding     
at the beginning of the     
reporting period  $38,540  $79,778 
Options opened  101,041  204,869 
Options exercised  —  — 
Options expired  (63,731)  (137,711) 
Options closed  (38,540)  (79,778) 
Written options outstanding at     
the end of the reporting period  $37,310  $67,158 

Note 4 — Capital shares

At the close of the reporting period, there were 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   
  Year ended 12/31/16  Year ended 12/31/15  Year ended 12/31/16  Year ended 12/31/15 
 
  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount 
Shares sold  43,639  $876,756  18,514  $384,487  27,926  $562,736  22,471  $459,583 
Shares issued in connection with                 
reinvestment of distributions  18,451  364,775  16,874  354,687  20,196  399,283  18,207  382,705 
  62,090  1,241,531  35,388  739,174  48,122  962,019  40,678  842,288 
Shares repurchased  (144,907)  (2,937,439)  (184,439)  (3,834,779)  (204,006)  (4,160,432)  (217,743)  (4,518,437) 
Net decrease  (82,817)   $(1,695,908)  (149,051)  $(3,095,605)  (155,884)  $(3,198,413)  (177,065)  $(3,676,149) 

 

Note 5 — Affiliated transactions

Transactions during the reporting period with any company which is under common ownership or control were as follows:

  Fair value at the beginning        Fair value at the end of 
Name of affiliate  of the reporting period  Purchase cost  Sale proceeds  Investment income  the reporting period 
Putnam Cash Collateral Pool, LLC *  $1,266,075  $9,505,529  $10,302,354  $5,257  $469,250 
Putnam Short Term           
Investment Fund ***  1,155,850  9,651,305  10,035,825  5,494  771,330 
Totals  $2,421,925  $19,156,834  $20,338,179  $10,751  $1,240,580 

*No management fees are charged to Putnam Cash Collateral Pool, LLC (See Note 1).

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

16   Putnam VT Research Fund 

 


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.

Note 7 — Summary of derivative activity

The volume of activity for the reporting period for any derivative type that was held during the period is listed below and was based on an average of the holdings at the end of each fiscal quarter:

Purchased equity option contracts (contract amount)  $26,000 
Written equity option contracts (contract amount) (Note 3)  $26,000 
Forward currency contracts (contract amount)  $4,600,000 
OTC total return swap contracts (notional)  $950,000 

The following is a summary of the fair value of derivative instruments as of the close of the reporting period:

Fair value of derivative instruments as of the close of the reporting period

  Asset derivatives Liability derivatives
Derivatives not accounted         
for as hedging instruments  Statement of assets and    Statement of assets and   
under ASC 815  liabilities location  Fair value  liabilities location  Fair value 
Foreign exchange contracts  Receivables  $58,235  Payables  $1,090 
Equity contracts  Investments, Receivables  24,934  Payables  12,688 
Total    $83,169    $13,778 

 

The following is a summary of realized and change in unrealized gains or losses of derivative instruments in the Statement of operations for the reporting period (see Note 1):

Amount of realized gain or (loss) on derivatives recognized in net gain or (loss) on investments

Derivatives not accounted for         
as hedging instruments under    Forward currency     
ASC 815  Options  contracts  Swaps  Total 
Foreign exchange contracts  $—  $96,875  $—  $96,875 
Equity contracts  5,226  —  (217,290)  $(212,064) 
Total  $5,226  $96,875  $(217,290)  $(115,189) 

Change in unrealized appreciation or (depreciation) on derivatives recognized in net gain or (loss) on investments

Derivatives not accounted for         
as hedging instruments under    Forward currency     
ASC 815  Options   contracts  Swaps  Total 
Foreign exchange contracts  $—  $25,011  $—  $25,011 
Equity contracts  (11,305)  —  27,398  $16,093 
Total  $(11,305)  $25,011  $27,398  $41,104 

 

Putnam VT Research Fund   17 

 


Note 8 — Offsetting of financial and derivative assets and liabilities

The following table summarizes any derivatives, repurchase agreements and reverse repurchase agreements, at the end of the reporting period, that are subject to an enforceable master netting agreement or similar agreement. For securities lending transactions or borrowing transactions associated with securities sold short, if any, see Note 1. For financial reporting purposes, the fund does not offset financial assets and financial liabilities that are subject to the master netting agreements in the Statement of assets and liabilities.

  Bank of America    Goldman Sachs  JPMorgan Chase  State Street Bank   
  N.A.  Citibank, N.A.  International  Bank N.A.  and Trust Co.  Total 
Assets:             
OTC Total return swap contracts*#  $—  $—  $6,088  $—  $—  $6,088 
Forward currency contracts#  99  7,287  20,470  26,835  3,544  58,235 
Purchased options**#  —  —  18,846  —  —  18,846 
Total Assets  $99  $7,287  $45,404  $26,835  $3,544  $83,169 
Liabilities:             
OTC Total return swap contracts*#  $—  $—  $—  $—  $—  $— 
Forward currency contracts#  1,059  —  —  31  —  1,090 
Written options #  —  —  12,688  —  —  12,688 
Total Liabilities  $1,059  $—  $12,688  $31  $—  $13,778 
Total Financial and Derivative             
Net Assets  $(960)  $7,287  $32,716  $26,804  $3,544  $69,391 
Total collateral received (pledged)†##  $—  $—  $—  $26,804  $—   
Net amount  $(960)  $7,287  $32,716  $—  $3,544   

* Excludes premiums, if any. Included in unrealized appreciation and depreciation on OTC swap contracts on the Statement of assets and liabilities.

** Included with Investments in securities on the Statement of assets and liabilities.

† Additional collateral may be required from certain brokers based on individual agreements.

# Covered by master netting agreement (Note 1).

## Any over-collateralization of total financial and derivative net assets is not shown. Collateral may include amounts related to unsettled agreements.

Note 9 — New pronouncements

In October 2016, the SEC adopted amendments to rules under the Investment Company Act of 1940 (“final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. The final rules amend Regulation S-X and require funds to provide standardized, enhanced derivative disclosure in fund financial statements in a format designed for individual investors. The amendments to Regulation S-X also update the disclosures for other investments and investments in and advances to affiliates and amend the rules regarding the general form and content of fund financial statements. The compliance date for the amendments to Regulation S-X is August 1, 2017. Putnam Management is currently evaluating the amendments and their impact, if any, on the fund’s financial statements.

Federal tax information (Unaudited)

The fund designated 83.26% of ordinary income distributions as qualifying for the dividends received deduction for corporations.

18   Putnam VT Research Fund 

 


About the Trustees


Putnam VT Research Fund   19 

 



*Mr. Reynolds is an “interested person” (as defined in the Investment Company Act of 1940) of the fund and Putnam Investments. He is President and Chief Executive Officer of Putnam Investments, as well as the President of your fund and each of the other Putnam funds.

The address of each Trustee is One Post Office Square, Boston, MA 02109.

As of December 31, 2016, there were 114 Putnam funds. All Trustees serve as Trustees of all Putnam funds.

Each Trustee serves for an indefinite term, until his or her resignation, retirement at age 75, removal, or death.

Officers

In addition to Robert L. Reynolds, the other officers of the fund are shown below:

Jonathan S. Horwitz (Born 1955)  Michael J. Higgins (Born 1976)  Mark C. Trenchard (Born 1962) 
Executive Vice President, Principal Executive  Vice President, Treasurer, and Clerk  Vice President and BSA Compliance Officer 
Officer, and Compliance Liaison  Since 2010  Since 2002 
Since 2004    Director of Operational Compliance, 
  Janet C. Smith (Born 1965)  Putnam Investments and Putnam 
Robert T. Burns (Born 1961)  Vice President, Principal Financial Officer,  Retail Management 
Vice President and Chief Legal Officer  Principal Accounting Officer, and Assistant   
Since 2011  Treasurer  Nancy E. Florek (Born 1957) 
General Counsel, Putnam Investments, Putnam  Since 2007  Vice President, Director of Proxy Voting and 
Management, and Putnam Retail Management  Director of Fund Administration Services,  Corporate Governance, Assistant Clerk, and 
  Putnam Investments and Putnam Management  Associate Treasurer 
James F. Clark (Born 1974)    Since 2000 
Vice President and Chief Compliance Officer  Susan G. Malloy (Born 1957)   
Since 2016  Vice President and Assistant Treasurer   
Chief Compliance Officer, Putnam Investments  Since 2007   
and Putnam Management  Director of Accounting & Control Services,   
  Putnam Investments and Putnam Management   

 

The principal occupations of the officers for the past five years have been with the employers as shown above, although in some cases they have held different positions with such employers. The address of each officer is One Post Office Square, Boston, MA 02109.

20   Putnam VT Research 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, 2016, are available in the Individual Investors section of putnam.com and on the Securities and Exchange Commission’s [SEC] 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 Form N-Q on the SEC’s website at www.sec.gov. In addition, the fund’s Form 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:  Kenneth R. Leibler, Vice Chair 
Boston, MA 02109  P.O. Box 8383  Liaquat Ahamed 
Boston, MA 02266-8383  Ravi Akhoury 
Investment Sub-Advisors  1-800-225-1581  Barbara M. Baumann 
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 
The Putnam Advisory Company, LLC  Legal Counsel  Robert E. Patterson 
One Post Office Square  Ropes & Gray LLP  George Putnam, III 
Boston, MA 02109  Robert L. Reynolds 
Independent Registered  W. Thomas Stephens 
Marketing Services  Public Accounting Firm 
Putnam Retail Management  PricewaterhouseCoopers LLP 
One Post Office Square     
Boston, MA 02109     

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.

Putnam VT Research Fund   21 

 


  H520 
This report has been prepared for the shareholders   
of Putnam VT Research Fund.  VTAN067 304277 2/17 

 

Item 2. Code of Ethics:
(a) The fund's principal executive, financial and accounting officers are employees of Putnam Investment Management, LLC, the Fund's investment manager. As such they are subject to a comprehensive Code of Ethics adopted and administered by Putnam Investments which is designed to protect the interests of the firm and its clients. The Fund has adopted a Code of Ethics which incorporates the Code of Ethics of Putnam Investments with respect to all of its officers and Trustees who are employees of Putnam Investment Management, LLC. For this reason, the Fund has not adopted a separate code of ethics governing its principal executive, financial and accounting officers.

Item 3. Audit Committee Financial Expert:
The Funds' Audit, Compliance and Distributions Committee is comprised solely of Trustees who are “independent” (as such term has been defined by the Securities and Exchange Commission (“SEC”) in regulations implementing Section 407 of the Sarbanes-Oxley Act (the “Regulations”)). The Trustees believe that each of the members of the Audit, Compliance and Distributions Committee also possess a combination of knowledge and experience with respect to financial accounting matters, as well as other attributes, that qualify them for service on the Committee. In addition, the Trustees have determined that each of Mr. Darretta, Mr. Patterson, Mr. Hill, and Ms. Baumann qualifies as an “audit committee financial expert” (as such term has been defined by the Regulations) based on their review of his or her pertinent experience and education. The SEC has stated, and the funds' amended and restated agreement and Declaration of Trust provides, that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit, Compliance and Distribution Committee and the Board of Trustees in the absence of such designation or identification.

Item 4. Principal Accountant Fees and Services:
The following table presents fees billed in each of the last two fiscal years for services rendered to the fund by the fund's independent auditor:


Fiscal year ended Audit Fees Audit-Related Fees Tax Fees All Other Fees
December 31, 2016 $30,515 $ — $4,695 $ —
December 31, 2015 $29,573 $ — $4,558 $ —

For the fiscal years ended December 31, 2016 and December 31, 2015, the fund's independent auditor billed aggregate non-audit fees in the amounts of $564,448 and $747,151 respectively, to the fund, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund.

Audit Fees represent fees billed for the fund's last two fiscal years relating to the audit and review of the financial statements included in annual reports and registration statements, and other services that are normally provided in connection with statutory and regulatory filings or engagements.

Audit-Related Fees represent fees billed in the fund's last two fiscal years for services traditionally performed by the fund's auditor, including accounting consultation for proposed transactions or concerning financial accounting and reporting standards and other audit or attest services not required by statute or regulation.

Tax Fees represent fees billed in the fund's last two fiscal years for tax compliance, tax planning and tax advice services. Tax planning and tax advice services include assistance with tax audits, employee benefit plans and requests for rulings or technical advice from taxing authorities.

Pre-Approval Policies of the Audit, Compliance and Distributions Committee. The Audit, Compliance and Distributions Committee of the Putnam funds has determined that, as a matter of policy, all work performed for the funds by the funds' independent auditors will be pre-approved by the Committee itself and thus will generally not be subject to pre-approval procedures.

The Audit, Compliance and Distributions Committee also has adopted a policy to pre-approve the engagement by Putnam Management and certain of its affiliates of the funds' independent auditors, even in circumstances where pre-approval is not required by applicable law. Any such requests by Putnam Management or certain of its affiliates are typically submitted in writing to the Committee and explain, among other things, the nature of the proposed engagement, the estimated fees, and why this work should be performed by that particular audit firm as opposed to another one. In reviewing such requests, the Committee considers, among other things, whether the provision of such services by the audit firm are compatible with the independence of the audit firm.

The following table presents fees billed by the fund's independent auditor for services required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.


Fiscal year ended Audit-Related Fees Tax Fees All Other Fees Total Non-Audit Fees
December 31, 2016 $ — $559,753 $ — $ —
December 31, 2015 $ — $742,593 $ — $ —

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) The Code of Ethics of The Putnam Funds, which incorporates the Code of Ethics of Putnam Investments, is filed herewith.

(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.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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

Date: February 28, 2017
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: February 28, 2017
By (Signature and Title):
/s/ Janet C. Smith
Janet C. Smith
Principal Financial Officer

Date: February 28, 2017