Franklin Mutual Shares Fund Class A, C

Transcription

1 Value Equity Product Profile Product Details 1 Fund Assets $15,790,982, Fund Inception Date 07/01/1949 Number of Issuers 106 Investment Style Benchmark Lipper Classification Morningstar Category Dividend Frequency Value Multi-Cap Value Funds Allocation 85%+ Equity CUSIP Semiannually in September and December NASDAQ Symbol Class A TESIX Class C TEMTX Class A Class C Maximum 5.75% initial sales charge 1.00% contingent deferred sales charge (CDSC) in the first year only Total Annual Operating Expenses Class A 1.05% Class C 1.8% Fund Description The fund seeks capital appreciation, with income as a secondary goal. Its strategy is focused on undervalued mid- and large-cap equity securities, which may include foreign securities and, to a lesser extent, distressed securities and merger arbitrage. Performance Data 2,3 Average Annual Total Returns 4,5 (%) 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception Class A - With Class A - Without Class C - With Class C - Without % 20% 0% -20% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception Class A - With Class A - Without 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. Calendar Year Returns (% Without ) Class A Class C If the Fund s sales charge had been included, the returns would have been lower. 1. All holdings are subject to change. Holdings of the same issuers have been combined. 2. Class A and Class C: Prior to 11/01/1996, the fund offered only a single class of shares without a sales charge and Rule 12b-1 expenses, Class Z shares. Figures reflect a restatement of the original share class to include both the Rule 12b-1 fees and maximum initial sales charges (when quoting figures with sales charges) applicable to each share class as though in effect from the fund s inception. For periods after 11/01/1996, actual performance is used, reflecting all charges and fees applicable to that class. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. 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. Since inception return for the benchmark is calculated to the fund inception date. Not FDIC Insured May Lose Value No Bank Guarantee

2 Portfolio Manager Insight 6 Market Review In the United States, the rose modestly, with most of the gain occurring before June. The rise in US stocks was largely driven by a focus on fundamentals, including solid corporate earnings and improving global economic growth. These positive factors managed to overcome lower commodity prices and geopolitical concerns. Nine of the 11 major equity sectors advanced, led by health care, industrials, financials and information technology. The telecommunication services and energy sectors were the only negative performers. Economic data in the United States were mixed. First-quarter real gross domestic product growth was revised up to a 1.4% annualized rate, from 1.2% and the initial estimate of 0.7% announced in April. The US labor market remained strong, although momentum appeared to slow. In particular, the May employment figures, released in early June, were weaker than expected, with downward revisions to figures for the prior two months. The Institute for Supply Management s manufacturing and nonmanufacturing indices slipped from their recent highs but remained at solid levels. US retail sales, housingrelated data and industrial production were mixed. First-quarter 2017 corporate earnings were up more than 15% year-over-year for Standard & Poor s 500 Index constituents. As widely expected, the US Federal Reserve s (Fed s) Federal Open Market Committee raised the target range for the federal funds by 25 basis points at its June meeting. Fed Chair Janet Yellen also stated the process of shrinking its balance sheet could start relatively soon. Separately, the Fed announced that all of the largest US banks had passed the Dodd-Frank Act stress test, and the Fed did not reject any of the banks plans to return capital to shareholders. Despite the Organization of the Petroleum Exporting Countries (OPEC) and certain non-opec countries renewal of their existing agreement to cut oil production in May, oil supplies did not narrow, and the price of West Texas Intermediate crude oil retreated. Investors also became less confident in the ability of the President and Republican-controlled Congress to implement pro-business policies, as Republicans in the House of Representatives and the Senate were unable to pass a health care reform bill before period-end. Performance Review During the quarter, three of the fund s largest contributors to absolute performance were Medtronic, Samsung Electronics and Novartis. Shares of medical device maker Medtronic rose in April as it announced the sale of its medical supplies business to Cardinal Health (not a fund holding) for $6.1 billion. Medtronic obtained the medical supplies business as part of its 2014 acquisition of Covidien. The medical supplies business, in our view, was not core to Medtronic s operations and was a less attractive asset in terms of profitability and future growth prospects. In addition, Medtronic stated that they will use the after-tax proceeds for an additional $1 billion in share buybacks and the remainder to pay down debt. The stock got a further boost in May from positive quarterly results. Earnings beat consensus expectations as solid revenues and successful execution on cost control efforts led to better operating profitability. South Korea-based Samsung Electronics produces smartphones and is a low cost provider of commodity memory products (e.g., dynamic randomaccess memory and flash memory), which have seen very strong pricing recently. Before the period under review, Samsung chief Jay Y. Lee was arrested for bribery as part of a wider government influence-peddling scandal that led to the impeachment of then president Park Geun-hye. However, investors quickly turned their focus to Samsung s better-than-expected earnings results announced in April. Samsung reported strong sales in its core businesses, including memory chips and OLED (organic light-emitting diode) displays. Despite adverse publicity surrounding its Note 7 smartphone in the fall of 2016, sales of its newest generation of smartphones have been running ahead of market expectations. Management also surprised investors in April by announcing a plan to cancel existing treasury shares held by the company. Novartis is a Switzerland-based health care company with meaningful market positions in biopharmaceuticals, especially oncology, generic pharmaceuticals through its Sandoz division, and eye care through its Alcon division. Investors reacted positively to news reports in April that the process of reviewing strategic options for its Alcon division may be moving along. Novartis has made substantial investments to turn around Alcon, but the process has taken longer than expected. We believe a sale or spinoff of Alcon may make sense at the right price. Also, in late April, Novartis reported decent quarterly results that beat consensus expectations. In June, it made good progress on its pipeline with two positive late stage trials, one for a drug to treating neovascular age-related macular degeneration and a second for a cardiovascular treatment for heart attack patients. The fund s largest detractors were Kroger, Marathon Oil and Symantec. Kroger is a Cincinnati-based grocery retailer that operates more than 2,400 grocery and multi-department stores in 31 states. Shares of Kroger declined in mid-june after the company announced its quarterly financial results and lowered its 2017 full year earnings outlook. Although quarterly results were in line with expectations, Kroger reduced its full-year 2017 earnings range due to its decision to accelerate investments in the form of higher wages, in order to lower employee turnover and improve productivity. In addition, Kroger decided to match certain promotions undertaken by some competitors. Kroger s management believes promotion activity will likely persist through 2017 as certain competitors come under pressure and attempt to maintain market share. Shortly after Kroger released its quarterly results, Amazon (not a fund holding) announced it had entered into a definitive agreement to purchase Whole Foods (not a fund holding), a high-end natural and organic grocery chain. In our view, the Whole Foods acquisition by Amazon validates the importance of having a brick and mortar presence to serve customers and distribute fresh grocery products. To date, Amazon and other e-commerce grocery retailers have had limited success finding a way to profitably deliver fresh groceries via an e-commerce order and delivery model. Overall, we believe Kroger is still among the strongest grocery retailers. The company is governed by an experienced shareholder-friendly management team; and we believe it has the capability to successfully navigate through the dynamic and competitive industry. Shares of Marathon Oil, a US-based oil and gas exploration and production company, have generally followed the path of declining oil prices in During the second quarter, Marathon closed on a number of transactions as part of its continued portfolio transformation. The deals closed included the sale of a Canadian oil sands asset and the acquisition of acreage in the northern Delaware basin of New Mexico. While we regard the price received for the oil sands asset to be merely adequate, we look favorably upon the continuing expansion of the company s resource portfolio and increasing focus on predictable, higher return onshore assets. Additionally, the transactions led to a further improvement in Marathon s balance sheet of approximately $700 million. These favorable changes were nonetheless overshadowed by an oil market, which remains both volatile and challenging. Symantec is a California-based technology company focused on security, storage and systems management solutions. In May, Symantec reported decent quarterly results, but investors reacted negatively to updated quarterly guidance that fell short of consensus estimates. In our view, the strong reaction was due in large part to overly optimistic expectations fueled by Symantec s solid operational results in the prior two quarters. franklintempleton.com 2

3 Portfolio Positioning At quarter-end, the fund s investment in equities was 81.8% while the level of cash and cash equivalents stood at 7.7%. In addition, 57.2% of foreign securities exposure was hedged back to the US dollar at quarter-end. The fund initiated or added to a few select positions during the period under review. Among the most notable of those names was a US-based industrials company with a wide range of business units. The stock price has languished in recent years, significantly underperforming the as investors have focused on the company s poor cash flow generation, poor merger and acquisition record, the company s significant underfunded pension liability, and a bloated cost structure. In our view, it does not have a growth problem like other industrial companies. In our view, the intensifying pressure by activist investors to improve its operational performance and a focus on cost and portfolio optimization, make the stock an attractive long-term opportunity. Conversely, we exited and trimmed a few positions during the period, including Reynolds American, A.P. Moeller-Maersk and Cigna. We exited those three positions as their respective stock prices climbed towards our estimates of intrinsic value. Compared to the benchmark, the fund continued to have a meaningful overweight in financials and sizable underweights in information technology and industrials. The fund had 5.7% of merger arbitrage exposure and nearly 4.8% invested in distressed debt. Merger and acquisition (M&A) activity in 2016 was strong and we believe the trend will continue in Catalysts for another busy year of M&A deals include the desire to enhance organic growth, ability to reduce costs through scale, expectations of additional rate hikes by the US Federal Reserve and many companies sitting on large sums of cash reserves. Private equity firms are also under pressure to deploy the collectively significant amount of idle cash. After some high profile deals failed because of regulatory opposition, there is a possibility the new Trump administration will be more permissive. Another drag on M&A activity may come from tighter capital controls by China s government in order to curb the flow of capital leaving the country, as Chinese companies were very active in M&A in On balance, we believe the forces encouraging M&A activity remain greater than the obstacles. We remain active in exploring merger arbitrage opportunities (investing in one or both of the companies and constructed solely to benefit from deal completion) and are working hard to make sure the potential rewards are significant enough to outweigh the risks that exist in the current environment. Credit spreads have generally narrowed during the first half of 2017 for BBB rated corporates, with the exception of some modest volatility during March and April. However, high yield spreads have generally stalled at levels seen at the end of This spread compression has provided us with the opportunity to exit many of the opportunities that emerged in early 2016, when credit spreads widened dramatically across industries and countries. As spreads narrowed, prices improved and risk-adjusted returns no longer appeared to be as favorable. As a result, mispriced risk in credit markets has become more difficult to discover. Some opportunities that have persisted are in generally unloved industries, such as specialty pharmaceuticals, hospitals, media/broadcasting, and telecommunications. Among these industries there is a common theme of increasing political or secular challenges. In sorting through these outcasts, we have sought out securities with the potential to benefit most from liquidity enhancing events, such as asset sales, the ability within existing agreements to issue secured debt, and free cash flow that could buy time for a company to weather its financial storm. In times when the credit markets are frothy and value is difficult to easily identify, we believe our industry specific expertise, deep fundamental analysis (focused on cash flow), and intensive credit and covenant review process provide us with unique ways of looking at the same company-specific opportunities that others may take a pass on. Outlook & Strategy We believe the general reflation trade rally that began after the US election in late 2016 has largely dissipated. Correspondingly, the post-election investor optimism based on hopes for rapid progress on a number of pro-growth initiatives, including tax reform and infrastructure investment, has faded in reaction to the struggle by the Republican-controlled Congress and President Donald Trump to pass health care legislation. Nonetheless, we believe the President and Republicans in Congress remain determined on following through with their ambitious agenda of reforms. With regard to businesses and profitability, we believe the drive to reduce regulation, much of which does not require legislation, has been well received and is making real progress. Modest but persistent US economic growth and firmer inflation have led investors to shift their focus towards corporate earnings, potential corporate pricing power, the possibility of more capital spending and the Fed s monetary policy path (including the pace of interest rate increases and how to shrink its balance sheet). However, numerous political risks exist, and we believe recent investor complacency, as reflected in the subdued readings of the Chicago Board Options Exchange Volatility Index (commonly referred to as the VIX) readings, leaves financial markets vulnerable to bouts of volatility in reaction to unexpected shocks. In such an environment, we expect to be nimble investors, seeking to take advantage of market reactions or potential overreactions to events. Despite the recent stretch of tepid US economic data, economic conditions are likely strong enough for the Fed to justify additional increases in interest rates this year. Higher rates and any steepening in yield curves would be positive for financials but negative for bond proxy stocks such as consumer staples and utilities. Whether the extension of crude oil production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and certain non-opec countries is largely offset by increased production in the United States and elsewhere will greatly determine near-term volatility in the energy sector. We believe a rebalancing of supply and demand is underway, although it has taken longer than expected to materialize. When it comes to our investment decisions, we maintain a bottom-up stockpicking process that focuses on buying good companies trading at discounts to their intrinsic values. Macroeconomic conditions and political events do affect valuations. However, we do not make top-down sector or geographic positioning decisions based on an anticipated event outcome. 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. 7. The portfolio characteristics listed are based on the fund s underlying holdings, and do not necessarily reflect the fund s characteristics. Due to data limitations all equity holdings are assumed to be the primary equity issue (usually the ordinary or common shares) of each security s issuing company. This methodology may cause small differences between the portfolio s reported characteristics and the portfolio s actual characteristics. In practice, Franklin Templeton s portfolio managers invest in the class or type of security which they believe is most appropriate at the time of purchase. The market capitalization figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 8. Source: FactSet. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. 9. 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. franklintempleton.com 3

4 Portfolio Characteristics 7,8,9 Portfolio Price to Earnings (12 Month Trailing) Price to Book Value Price to Cash Flow Market Capitalization (Millions in USD) 90, ,786 Portfolio Diversification Top Ten Holdings 10 Top Holdings Sector Country % MEDTRONIC PLC Health Care Equipment & Services United States 3.56 MERCK & CO INC Pharmaceuticals, Biotechnology & Life Sciences United States 2.80 ELI LILLY & CO Pharmaceuticals, Biotechnology & Life Sciences United States 2.41 TIME WARNER INC Media United States 2.13 MICROSOFT CORP Software & Services United States 2.12 SYMANTEC CORP Software & Services United States 2.09 AMERICAN INTERNATIONAL GROUP INC Insurance United States 2.01 NOVARTIS AG Pharmaceuticals, Biotechnology & Life Sciences Switzerland 2.01 BRITISH AMERICAN TOBACCO PLC Food Beverage & Tobacco United Kingdom 1.89 CHARTER COMMUNICATIONS INC Media United States 1.85 Geographic Weightings vs. 11 United States United Kingdom Switzerland Bermuda South Korea Israel Finland Germany Netherlands Cash & Cash Equivalents % 25% 50% 75% 100% 125% Sector Weightings vs. 12 Financials Health Care Information Technology Consumer Discretionary Consumer Staples Energy Industrials Materials Telecommunication Services Real Estate Utilities Muni Securities Cash & Cash Equivalents % 5% 10% 15% 20% 25% Franklin Mutual Shares Fund Franklin Mutual Shares Fund 7. The portfolio characteristics listed are based on the fund s underlying holdings, and do not necessarily reflect the fund s characteristics. Due to data limitations all equity holdings are assumed to be the primary equity issue (usually the ordinary or common shares) of each security s issuing company. This methodology may cause small differences between the portfolio s reported characteristics and the portfolio s actual characteristics. In practice, Franklin Templeton s portfolio managers invest in the class or type of security which they believe is most appropriate at the time of purchase. The market capitalization figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 8. Source: FactSet. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. 9,11,12. 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. 10. Holdings of the same issuers have been combined. Top ten holdings information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. The information provided is not a recommendation to purchase, sell, or hold any particular security. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise be included. franklintempleton.com 4

5 Largest Sector Contributors vs. 13 Total Sector Effect (%) Telecommunication Services 0.32 Industrials 0.24 Materials 0.24 Utilities 0.02 Municipal Bonds - Smallest Sector Contributors vs. 14 Total Sector Effect (%) Cash & Other Net Assets Consumer Staples Energy Information Technology Consumer Discretionary Contributors data shown is for the period 04/01/2017 to 06/30/2017. Asset Allocation 15 EQUITY CASH & CASH EQUIVALENTS 7.69 FIXED INCOME % 20% 40% 60% 80% 100% Supplemental Performance Statistics Supplemental Risk Statistics 16,17 Class A 3 Yrs 5 Yrs 10 Yrs Standard Deviation Tracking Error Information Ratio Beta Sharpe Ratio 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. 13,14. Data is calculated as a percentage of total including cash and cash equivalents but excluding fixed income. Total Effect represents the opportunity cost of investment decisions in a group relative to the overall benchmark. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 15. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to rounding. All holdings are subject to change. 16. Beta, Information Ratio and Tracking Error information are measured against the. 17. Information ratio is a way to evaluate a manager s ability to outperform a benchmark in relation to the risk that manager is assuming, with risk defined as deviation from the benchmark. This measure is calculated by dividing the portfolio s excess return (portfolio return less the benchmark return) by the tracking error (derived by taking the standard deviation of the monthly differences between the portfolio return and the benchmark return over time). franklintempleton.com 5

6 Investment Philosophy and Process Bottom-Up Value Approach Franklin Mutual Series Unique Value Strategy We seek to buy companies at a significant discount to their intrinsic value. We seek to understand and limit downside risk. We think and act like owners of the business. Undervalued stocks comprise the bulk of our portfolios. We search for catalysts to unlock value: Undervalued Stocks Corporate restructuring Spin-offs Share buybacks Our own initiatives Distressed Securities Merger Arbitrage Investment Team Portfolio Manager Years with Firm Years Experience Peter Langerman F. David Segal, CFA Deborah Turner, CFA Glossary 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%. Information Ratio: In investing terminology, the ratio of expected return to risk. Usually, this statistical technique is used to measure a manager s performance against a benchmark. This measure explicitly relates the degree by which an investment has beaten the benchmark to the consistency by which the investment has beaten the benchmark. Market Capitalization: A determination of a company s value, calculated by multiplying the total number of company stock shares outstanding by the price per share. Market capitalization is expressed in millions of USD. Price to Book Value: The price per share of a stock divided by its book value (i.e., net worth) per share. For a portfolio, the value represents a weighted average of the stocks it holds. Price to Cash Flow: Supplements price/earnings ratio as a measure of relative value for a stock. For a portfolio, the value represents a weighted average of the stocks it holds. FY1 Price to Earnings: A measure of the price to earnings ratio (P/E) using forecasted earnings for the P/E calculation. The forecasted earnings for FY1 represent the forecasted earnings at the end of the next fiscal year-end period. Sharpe Ratio: To calculate a Sharpe ratio, an asset s excess returns (its return in excess of the return generated by risk-free assets such as Treasury bills) are divided by the asset s standard deviation. Standard Deviation: A measure of the degree to which a fund s returns varies from the average of its previous returns. The larger the standard deviation, the greater the likelihood (and risk) that a fund s performance will fluctuate from the average return. Tracking Error: Measure of the deviation of the return of a fund compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment fund is managed, the smaller the tracking error. franklintempleton.com 6

7 What Are The Risks? All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. The fund s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The fund may invest in lower-rated bonds, which entail higher credit risk. Please consult the prospectus for a more detailed description of the fund s risks. 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. Standard & Poor s, S&P and S&P 500 are registered trademarks of Standard & Poor s Financial Services LLC. S&P does not sponsor, endorse, sell or promote and S&P index-based product. Source: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Important data provider notices and terms available at: Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2017 Franklin Templeton Investments. All rights reserved. 474 PP 06/17