Franklin Flexible Alpha Bond Fund. Advisor Class

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1 Franklin Flexible Alpha Bond Fund Advisor Class Absolute Return Fixed Income Product Profile Product Details 1 Fund Assets $416,313, Fund Inception Date 08/03/2015 Number of 406 Including Cash NASDAQ Symbol FZBAX Maximum Sales Charge 0.00 Investment Style Absolute Return Benchmark LIBOR 90 Day (USD) Index Lipper Classification Alternative Credit Focus Funds Morningstar Category Nontraditional Bond Dividend Frequency Monthly Asset Allocation 2 Fixed Income Fund Description The fund seeks to provide total return through a combination of current income and capital appreciation by investing at least 80% of its net assets in bonds and investments that provide exposure to bonds, including global debt obligations of any credit quality, maturity or duration, and derivatives. The fund aims to provide attractive risk-adjusted total returns over a full market cycle. Performance Data 3 Average Annual Total Returns 4 (%) Since Inception 3 Mths YTD 1 Yr 3 Yrs (08/03/2015) Advisor Class LIBOR 90 Day (USD) Index 3% 2% 1% 0% Mths YTD 1 Yr 3 Yrs Since Inception Advisor Class LIBOR 90 Day (USD) Index 0% 25% 50% 75% 100% Total Annual Operating Expenses With Waiver: 0.94% Without Waiver: 0.99% 30-Day Standardized Yield 5 With Waiver: 2.48% Without Waiver: 2.44% Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. Advisor Class shares are offered only to certain eligible investors as stated in the prospectus. They are offered without sales charges or Rule 12b-1 fees. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. The fund has an expense reduction and a fee waiver associated with any investments it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 08/31/2019. Fund investment results reflect the expense reduction and fee waiver; without these reductions, the results would have been lower. 1. All holdings are subject to change. 2. Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 3. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 4. Periods shorter than one year are shown as cumulative total returns. 5. The fund s 30-day standardized yield is calculated over a trailing 30-day period using the yield to maturity on bonds and/or the dividends accrued on stocks. It may not equal the fund s actual income distribution rate, which reflects the fund s past dividends paid to shareholders. Not FDIC Insured May Lose Value No Bank Guarantee

2 Calendar Year Returns (%) Advisor Class LIBOR 90 Day (USD) Index Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. Portfolio Manager Insight 6 Performance Review QUARTERLY KEY PERFORMANCE DRIVERS HELPED HURT Against the backdrop of constructive bank loan market fundamentals, our allocation to the sector contributed to performance. Our allocation to RMBS benefited from strong sector returns and also contributed toward results. Among currency exposures, positive returns from our long Mexican peso exposure were offset by negative performance of our Indian rupee, Indonesian rupiah and Canadian dollar positions. Outlook & Strategy Although rising US interest rates have pressured certain emerging markets, we think the US economic outlook remains supportive of further, measured steps in the US Federal Reserve s (Fed s) tightening process along with reductions in its balance sheet. We expect the yield curve to respond accordingly; however, we believe the flattening trend should continue as demographic and technological factors act to keep longer-term rates anchored, in our estimation. In terms of currencies, fiscal and/or demographic conditions suggest limited value in many of the major developed markets. We think select positions in fiscally sound economies with more modest dependence on exports may offer better prospects. While fundamentals remain supportive of corporate credit, we believe both macro-related developments and the extended credit cycle warrant a somewhat more cautious approach as illustrated by tail-risk hedges and selective moves into higher-quality credits. Within the securitized sectors, agency mortgage-backed security (MBS) fundamentals remain supportive and the prepayment outlook fairly benign, though low expected return and tight historical yield spreads lead us to retain a cautious stance on agency MBS. Within the non-agency RMBS sector, higher mortgage rates should decrease prepayments and slow the deleveraging process in the sector; the portfolio s exposure to the sector, however, is allocated higher in the capital structure where we do not anticipate material extension-related risks. The portfolio retains its overweight to nonagency RMBS, and we continue to seek opportunities in the sector. Commercial mortgage-backed security (CMBS) underwriting standards have eased, especially in multi-family originations by government sponsored enterprises. As the credit curve has continued to flatten and yield spreads have hovered close to all time tight levels, we maintain a cautionary stance as we believe we are nearing an end to this cycle. As such, we prefer to invest in high-quality collateral and remain higher in the CMBS structure with a bias for shorter-duration assets. 6. The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager s assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund s portfolio selection process. Holdings are subject to change. Portfolio Characteristics 7,8 Duration/Yield Curve Sector Allocation US dollar yield-curve positioning Bank loans Investment-grade corporate bonds Residential mortgage-backed securities (RMBS) Non-US dollar yield-curve positioning Covered bonds Treasury Inflation Protected (TIPS) Average Duration Average Weighted Maturity Portfolio 0.18 Yrs 4.53 Yrs 7. The portfolio characteristics listed are based on the fund s underlying holdings, and do not necessarily reflect the fund s characteristics. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 8. Average Duration and Average Weighted Maturity reflect certain derivatives held in the portfolio (or their underlying reference assets). franklintempleton.com 2

3 Portfolio Diversification Currency Allocations 9 US Dollar Japanese Yen Swedish Krona Mexican Peso Indian Rupee Indonesian Rupiah Polish Zloty Norwegian Krone Euro British Pound Philippine Peso Australian Dollar Canadian Dollar % 0% 20% 40% 60% 80% 100% 120% Duration Contribution by Currency 10 US Dollar 0.23 Australian Dollar Canadian Dollar Euro Yr 0 1 Yr Sector Exposure 11,12 Credit Quality Exposure 13 Residential Mortgage-Backed Bank Loans Collateralized Loan Obligations Investment Grade Corporates International Bonds Commercial Mortgage-Backed Covered Bonds High Yield Corporates Treasury Inflation-Protected Municipal Bonds Agency Mortgage-Backed Asset-Backed Interest Rate Derivatives Other -60% % -20% 0% 20% 40% AAA AA 9.61 A BBB BB 7.13 B CCC CC NR N/A % 5% 10% 15% 20% 25% 30% 35% Investment Grade Non-Investment Grade Investment Philosophy We believe that applying a tactical, risk-focused approach to a diversified set of holdings across global fixed income sectors can create a more attractive risk/return profile that can help to neutralize the impact of interest rate risk. Investment Process Fund s Investment Universe and Flexible Range of Tools to Potentially Drive Alpha 9,10. Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 11. Figures are intended to estimate the portfolio s exposure, including any hedged or increased exposure through certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 12. Interest Rate Derivatives sector consists of Treasury, interest rate and other derivatives that are primarily used for duration management; a negative number indicates that we are seeking to hedge interest rate risk. 13. Figures are intended to estimate the portfolio s exposure to issuer credit risk, including any hedged or increased exposure through credit derivatives held in the portfolio (or their underlying reference assets), and may not total 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. Any credit derivatives are assigned the ratings of their underlying reference assets. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. Ratings shown are assigned by one or more Nationally Recognized Statistical Rating Organizations ( NRSRO ), such as Standard & Poor s, Moody s and Fitch. The ratings are an indication of an issuer s creditworthiness and typically range from AAA or Aaa (highest) to D (lowest). When ratings from all three agencies are available, the middle rating is used; when two are available, the lowest rating is used; and when only one is available, that rating is used. If listed, the NR category consists of ratable securities that have not been rated by an NRSRO. The N/A category consists of nonratable securities (e.g., equities). Cash includes equivalents, which may be rated. franklintempleton.com 3

4 Broad Investment Universe Alpha Strategies Beta Management Franklin Flexible Alpha Bond Fund Investment Team Portfolio Manager Years with Firm Years Experience David Yuen, CFA, SVP/Head of Quantitative Portfolio Management Group Michael Materasso, SVP / Head of Insurance Portfolio Management / Co-Chair of FIPC Additional Resources Bank Loans Corporates - High Yield Corporates - Investment Grade Global Sovereign/EMD Local Asset Management MBS Municipals Quantitative Alpha: Alpha measures the difference between a fund s actual returns and its expected returns given its risk level as measured by its beta. A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund s beta. Some investors see alpha as a measurement of the value added or subtracted by a fund s manager. Average Duration: A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Average Weighted Maturity: An estimate of the number of terms to maturity, taking the possibility of early payments into account, for the underlying holdings. Maturity is expressed as a number of years. Beta: A measure of the magnitude of a portfolio s past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%. franklintempleton.com 4

5 What Are The Risks? All investments involve risk, including possible loss of principal. Changes in the financial strength of a bond issuer or in a bond s credit rating may affect its value. Interest rate movement and mortgage prepayments will affect the fund s share price and yield. During periods of declining interest rates, principal prepayments tend to increase as borrowers refinance their mortgages at lower rates; therefore the fund may be forced to reinvest returned principal at lower interest rates, reducing income. Bond prices generally move in the opposite direction of interest rates. Thus, as the price of bonds in the fund adjust to a rise in interest rates, the fund s share price may decline. The fund may be affected by issuers that fail to make interest payments and repay principal when due. The risks associated with higher-yielding, lower-rated securities (commonly called junk bonds) include higher risk of default and loss of principal. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio which may result in significant volatility and cause the fund to participate in losses (as well as enable gains) in an amount that exceeds the fund s initial investment. The fund may not achieve the anticipated results, and may realize losses when a counterparty fails to perform as intended. These and other risks considerations are discussed in the fund s prospectus. Important Legal Information Investors should carefully consider a fund s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/ or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. Important data provider notices and terms available at: Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2018 Franklin Templeton Investments. All rights reserved. 983 PP 09/18