Templeton Growth (Euro) Fund A. A (acc) EUR

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1 Templeton Growth (Euro) Fund A (acc) EUR Franklin Templeton Investment Funds Fund Manager Report Value Equity Product Details Fund Assets Fund Inception Date 09/08/2000 Number of Issuers 88 Bloomberg ISIN Base Currency Investment Style Overall Morningstar Rating TM 2 TEMGREU LX LU EUR Value Benchmark MSCI All Country World Index Morningstar Category Global Large-Cap Value Equity Asset Allocation 1 % Equity Cash & Cash 5.89 Equivalents Fixed Income 0.48 Fund Description The fund aims to achieve long-term capital appreciation by investing primarily in equity securities of companies worldwide, including emerging markets. Key Points Global equities advanced for a record 13th consecutive month in November when measured in US dollars and local currency terms but declined slightly in strengthening euros. Global economic growth remained broadly firm during the month, leading the Organisation for Economic Cooperation and Development (OECD) to upgrade 2018 growth expectations to 3.7%, an eight-year high. Stock selection in the industrials and telecommunication services sectors dampened relative results in November. Positioning in energy and stock selection in the information technology sector further eroded relative performance. In contrast, stock selection in the consumer discretionary and consumer staples sectors boosted relative results. Regionally, an unfavourable overweight in Europe and an underweight in the United States detracted from relative performance. The fund s Asia allocation suffered primarily from stock selection in China and Japan. Stock selection in Indonesia and the United Kingdom contributed to relative results. Performance Data Performance Net of Management Fees as at 30/11/2017 (Dividends Reinvested) (%) 3 1 Mth 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception (09/08/2000) A (acc) EUR MSCI All Country World Index Calendar Year Returns (%) 100% 50% 0% -50% A (acc) EUR Past performance is not an indicator or a guarantee of future performance. Portfolio Manager Insight Market Review Global equity markets continued advancing in US-dollar terms during November Investors appeared to focus largely on expectations surrounding tax reform in the United States and generally positive economic data around the globe, rather than North Korea s missile tests. Developed-market equities, as measured by MSCI indices, collectively topped their emergingmarket peers, which overall advanced slightly. US third-quarter gross domestic product (GDP) growth was revised higher in November and was slightly above the second-quarter reading. Although the US unemployment rate in October was at a post-recession low, wage growth has remained feeble. Subdued US inflation, which has remained below the US Federal Reserve s (Fed s) annual target, has continued to support purchasing power. In November, the Fed left its benchmark interest rate unchanged, and Fed member Jerome Powell was nominated to replace current Fed Chair Janet Yellen. The European Commission raised its economic forecast for the euro area for 2017 to the fastest pace in a decade. The euro area s unemployment rate in October edged down to the lowest reading since January 2009, and the European Union rate was the lowest since November The United Kingdom s unemployment rate for July to September was also encouraging, hitting its lowest level

2 since 1975, while its annualised Consumer Price Index for October remained at a five-year high. In early November, the Bank of England hiked its benchmark interest rate for the first time in 10 years. Japan s preliminary GDP growth figure for the third quarter showed modestly solid growth yearon-year. Amongst emerging markets, China s industrial output and retail sales rose in October, albeit at a slower pace. Its fixed-asset investment for 2017 through October showed strong growth, though it continued a slight downward trend. South Korea upwardly revised its third-quarter annualised GDP growth. During November, the country s central bank raised interest rates for the first time in six years. Brazil s third-quarter GDP grew year-on-year, with agriculture growing, industry flat and services rising. Mexico s third-quarter GDP growth was the weakest year-on-year reading since 2013 the economy contracted quarter-on-quarter and September industrial production declined, likely a result of the earthquakes that month. Performance Review The fund trailed the benchmark (both in euros) during the month of November. Despite hitting new highs during the month, markets assumed a somewhat more defensive posture, with traditionally counter-cyclical sectors like consumer staples and telecommunication services outperforming pro-cyclical sectors like materials, information technology and energy. The economically sensitive consumer discretionary sector was the exception to this trend, with retailers rallying on strong pre-holiday sales volumes. Overall, the fund benefitted from positive stock selection in November, but was pressured by unfavourable sector and regional allocations. Stock selection in the industrials sector pressured the fund s results relative to the benchmark in November, with UK defence contractor BAE Systems the biggest relative detractor in the sector. Its shares declined after some of BAE s smaller competitors attributed worse-than-expected quarterly earnings to delays, deferrals and cancellations of UK orders. While concerns about potential weakness in UK defence spending amidst uncertain Brexit proceedings look discounted in BAE s share price, we actually see limited read-through for the company, which sources the majority of its revenues outside of the United Kingdom. Despite the United Kingdom reiterating its commitment to defence spending of 2% of gross domestic product, the Ministry of Defence is under pressure to reduce costs. However, most of BAE s business with the British government involves multi-year programmes that are fully contracted and funded; while these could conceivably be delayed, it would only make the contracts more expensive for the United Kingdom in the long term. In the overseas segment where the company makes most of its sales, BAE has continued to report solid progress amidst a gradually strengthening global defence spending environment. Most notably, earlier in the fall, Qatar signalled its intent to buy 24 Eurofighter Typhoon jets from BAE, and we believe the stock should benefit once this order materialises. Continued progress addressing the firm s pension deficit also could support the shares in the medium term. Germany-based industrial and consumer product manufacturer Siemens also weighed on relative results in the sector. Stock selection amongst the fund s telecommunications holdings also pressured relative performance. Japanese telco operator and technology conglomerate SoftBank, the fund s top sector contributor last month, declined in November after the firm failed to reach an agreement to merge its US subsidiary, Sprint (not a fund holding), with rival T-Mobile (not a fund holding). While the potential scale and synergies of the combined company would have aided Sprint s turnaround ambitions, SoftBank could not negotiate terms that would have allowed it to maintain control of the combined company, a critical stipulation given the importance of US wireless infrastructure to the firm s ancillary investments. Traditionally viewed as a telecommunications company, SoftBank today is more of a technology conglomerate, recently receiving favourable comparisons to Warren Buffett s Berkshire Hathaway (not a fund holding). Unlike Berkshire, however, SoftBank s equity has been trading at a significant discount to its sum-of-theparts valuation, in our analysis, largely due to concerns about the company s appetite for large, debt-fuelled acquisitions. We have identified several catalysts that could help narrow this valuation discount, including a mark-to-market accounting of SoftBank s stake in Chinese e-commerce giant Alibaba (not a fund holding), and potential management fees from the company s recently formed US$100 billion technology investment fund. Overall, we have remained holders of the stock in anticipation of the shares approaching what we view as fair value. An overweight and stock selection in the energy sector also pressured relative returns, despite a tailwind from generally rising oil prices and the announcement at the end of the month that OPEC (Organization of the Petroleum Exporting Countries) would extend output cuts until December Shares of Hong Kong gas infrastructure firm Kunlun Energy declined during the month after the stock was removed from the Hong Kong Stock Exchange following a quarterly review. Despite the negative implications for trading volumes in the near term, we remain holders of Kunlun in anticipation of longer-term valuation and earnings upside potential. Overall, we think the company has remained on a path to more stable returns, with fewer commodity exposed assets and greater long-term growth potential. Within the energy space more broadly, we have been more biased towards selling in recent months as moves in the oil price and subsequent rallies in our holdings have made the sector s risk/reward prospects somewhat less attractive. As we have discussed recently, we expect oil prices to remain range-bound and note that West Texas Intermediate crude prices are approaching the critical US$60 per barrel threshold that makes it economical for many of the swing producers in the North American shale fields to resume production. Barring any exogenous shocks, we expect renewed supply above US$60/barrel would likely cap further significant price appreciation, and we look to selectively reduce exposure at this point in the cycle. Other notable sector detractors during the month included stock selection in the information technology, health care and materials sectors. Amongst these sectors, South Korean semiconductor and consumer electronics group Samsung Electronics, Swedish medical device manufacturer Getinge, and US enterprise software firm Oracle were the fund s bottom three performers. Turning to contributors, the fund s consumer stocks were points of relative strength. Strong stock selection amongst consumer discretionary holdings helped deliver four of the fund s five biggest contributors in November, including US media conglomerate Twenty-First Century Fox, UK home improvement retailer Kingfisher, Indonesian retailer PT Matahari Department Store, and US company Advance Auto Parts. Fox was the biggest contributor, rallying strongly (in local currency terms) after beating consensus sales expectations and mulling a potential sale of major parts of its business. We have long argued that Fox is well positioned within its industry, with a vast and growing portfolio of diversified content brands, including young networks that are currently under-earning and feature significant growth potential from a low base. Fox brands still command large audiences and premium pricing, especially due to the firm s strong sports offering and niche news network. The company has continued to grow its digital presence and improve monetisation offsetting concerns about declining pay-tv subscribers and traditional viewership and has a compelling international growth strategy, leading us to believe that value can eventually be recognised either organically through continued operational success or explicitly through acquisition of Fox assets at a premium. From the consumer staples sector, shares of US cosmetics manufacturer Coty advanced after strong earnings results appeared to vindicate the firm s acquisition of a suite of upscale brands from Procter & Gamble (not a fund holding). We have continued to believe that, following the integration of substantial acquisitions over the past year, Coty now has the scale and diversification to deliver steadier growth over a range of mass consumer and prestige brands. We have remained conservative in our top-line growth forecasts and assume that Coty s continued success integrating and operating its attractive portfolio should help bolster operating margins that remain well below those of its competitors. Market franklintempleton.lu 2

3 expectations have remained low, though company insiders have been actively buying stock over the past several quarters and we believe the shares have significant scope for re-rating should Coty continue to execute strategically. US-based drugstore Walgreen Boots Alliance further supported relative performance in the sector. Regionally, an unfavourable overweight in Europe and an underweight in the United States detracted from relative performance. The fund s Asia allocation suffered primarily from stock selection in China and Japan. Stock selection in Indonesia and the United Kingdom contributed to relative results. Portfolio Positioning In the month of November, the fund was most overweight the energy, health care and financials sectors, while the biggest underweight sectors were consumer staples, industrials and IT. The fund had no exposure to the real estate sector. Outlook & Strategy We have not been alone in observing that, after years of multiple expansion, a relatively expensive US stock market has needed continued earnings growth to sustain its historic rally. Those earnings came through in 2017 and may be on track to deliver in 2018 depending on the details of the tax reform bill that was making its way through Congress at month-end. Beyond this potential one-time step-up in corporate profitability, earnings growth may be difficult to sustain given continued weak inflation, productivity and wage growth that appear to coincide with an increasingly mature point of the economic and monetary policy cycle. Outside of the United States, we have continued to find what we view as compelling values in places where market and economic cycles appear to be at an earlier stage. In Europe, the credit cycle has been improving from a low base, unemployment has been falling, the yield curve has been steepening and political dramas have been successfully contained thus far. In emerging markets, relative earnings momentum has been bottoming and investment flows have been improving. We would not be surprised to see the continued passing of the baton from the United States to international equity markets in 2018, as was the case intermittently in 2017, though the prospects for a stronger US dollar amidst fiscal stimulus and policy tightening could complicate this rotation. Another rotation that seems inevitable to us at some point is an eventual shift away from hyper-cyclical market leadership. The price-to-book ratio of global cyclical stocks to defensives is at levels reached only twice in the past two decades: the peak of the Tech Bubble and the stimulus-fuelled, China-led commodity bull market of We anticipate an eventual rotation away from what we view as expensive (and largely US-domiciled) growth stocks and towards cheaper, international value stocks, and believe the fund is well positioned to potentially benefit from such a dynamic over a long-term investment horizon. Portfolio Characteristics 4,5 Portfolio Price to Earnings (12 Month Trailing) 17.31x 20.35x Price to Book Value 1.53x 2.31x Price to Cash Flow 7.56x 12.03x Market Capitalisation (Millions in EUR) 93,757 94,495 Dividend Yield 2.60% 2.32% Portfolio Diversification Top Sector Contributors 6,6 Total Sector Effect (%) Consumer Discretionary 0.36 Contributors/detractors data shown is for the period from 01/11/2017 to 30/11/2017. Top Security Contributors 6,7 Security Total Effect (%) TWENTY-FIRST CENTURY FOX 0.29 INC KINGFISHER PLC 0.12 MATAHARI DEPARTMENT STORE 0.11 TBK PT COTY INC 0.10 ADVANCE AUTO PARTS 0.09 Top Sector Detractors 6,6 Total Sector Effect (%) Telecommunication Services Industrials Energy Financials Health Care Top Security Detractors 6,7 Security Total Effect (%) SAMSUNG ELECTRONICS CO LTD GETINGE AB ORACLE CORP BAE SYSTEMS PLC AMERICAN INTERNATIONAL GROUP Contributors/detractors data shown is for the period from 01/11/2017 to 30/11/2017. franklintempleton.lu 3

4 Geographic Weightings vs. 1 NORTH AMERICA EUROPE ASIA MID-EAST/AFRICA CASH & CASH EQUIVALENTS % 25% 50% 75% Sector Weightings vs. 1 Financials Health Care Information Technology Energy Consumer Discretionary Telecommunication Services Industrials Materials Utilities Consumer Staples Real Estate Cash & Cash Equivalents % 5% 10% 15% 20% 25% Templeton Growth (Euro) Fund Templeton Growth (Euro) Fund Top Ten Holdings 8 Top Holdings Sector % ROYAL DUTCH SHELL PLC Energy 2.52 SAMSUNG ELECTRONICS CO LTD Technology Hardware & Equipment 2.42 ORACLE CORP Software & Services 2.38 CITIGROUP INC Banks 2.21 AMGEN INC Pharmaceuticals, Biotechnology & Life Sciences 1.86 KINGFISHER PLC Retailing 1.85 TWENTY-FIRST CENTURY FOX INC Media 1.83 BP PLC Energy 1.76 STANDARD CHARTERED PLC Banks 1.67 ALLERGAN PLC Pharmaceuticals, Biotechnology & Life Sciences 1.58 Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) Templeton Growth (Euro) Fund Tracking Error (%) Information Ratio Beta Sharpe Ratio Templeton Growth (Euro) Fund Beta, Information Ratio and Tracking Error information are measured against the. franklintempleton.lu 4

5 Investment Team Portfolio Manager Years with Firm Years Experience Norman Boersma, CFA, Chief Investment Officer Tucker Scott, CFA, EVP, Portfolio Manager, Research Analyst Heather Arnold, CFA, EVP, Director of Research, Portfolio Manager, Research Analyst James Harper, CFA, EVP, Portfolio Manager, Research Analyst Templeton Global Equity Team Number of Members Average Years Experience Portfolio Managers/Analysts Research Analysts franklintempleton.lu 5

6 Important Legal Information This document does not constitute legal or tax advice nor is it investment advice or an offer for shares of Franklin Templeton Investment Funds (the Fund ). Subscriptions to shares of the Fund can only be made on the basis of the current prospectus and, where available, the relevant Key Investor Information Document, accompanied by the latest available audited annual report and the latest semi-annual report accessible on our website or which can be obtained, free of charge, from Franklin Templeton International Services, S.à r.l. - 8A, rue Albert Borschette, L-1246 Luxembourg. Past performance is not an indicator or a guarantee of future performance. The value of shares in the Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. Investment in the Fund entails risks which are described in the Fund s prospectus and, where available, in the relevant Key Investor Information Document. Special risks may be associated with a Fund s investment in certain types of securities, asset classes, sectors, markets, currencies or countries and in the Fund s possible use of derivatives. References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund s holdings at any one time. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, your performance may also be affected by currency fluctuations. Where a Fund invests in emerging markets, this investment can be more risky than an investment in developed markets. No shares of the Fund may be directly or indirectly offered or sold to residents of the United States of America. Shares of the Fund are not available for distribution in all jurisdictions and prospective investors should confirm availability with their local Franklin Templeton Investments representative before making any plans to invest. 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. In addition, it should not be assumed that any securities mentioned were or will prove to be profitable. Stocks mentioned in this report are not a solicitation to purchase those stocks, and are examples of some stocks which performed well. Not all stocks in the portfolio performed as well. For the most current information on the fund, please contact your Franklin Templeton marketing representative. Performance figures are not based on audited financial statements and assume reinvestment of interest and dividends. When comparing the performance of Franklin Templeton Investment Funds (the Fund ) with a benchmark index, it is important to note that the securities in which Franklin Templeton Investment Funds invests may be substantially different than those represented by the benchmark index. Furthermore, an investment in Franklin Templeton Investment Funds represents an investment in a managed investment company in which certain charges and expenses, including management fees, are applicable. These charges and expenses are not applicable to indices. Lastly, please note that indices are unmanaged and are not available for direct investment. Certain data and other information shown have been supplied by outside sources. While we consider that information to be reliable, we give no assurance that such data and information is accurate or complete. References to indexes are made for comparative purposes only and are provided to represent the investment environment existing during the time periods shown. The indices include a greater number of securities than those held in the Fund. An index is unmanaged and one cannot invest directly in an index. The performance of the index does not include the deduction of expenses and does not represent the performance of any Franklin Templeton fund. Past performance is not an indicator or a guarantee of future performance. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at: 1. 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 Morningstar, Inc. All rights reserved. The information contained herein is proprietary to Morningstar and/or its content providers; may not be copied or distributed; and is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. 3. Source for all information is Franklin Templeton Investments. Benchmark related data provided by FactSet. Past performance is not an indicator or a guarantee of future performance. Periods greater than one year are shown as average annual total returns. Fund performance data include reinvested dividends, and is net of management fees. Sales charges, other commissions, taxes and other relevant costs to be paid by the investor are not included. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. 4. 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 capitalisation figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. Source: Factset. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 5. The dividend yield quoted here is the yield on securities within the portfolio and should not be used as an indication of the income received from this portfolio. 6. Past performance is not an indicator or a guarantee of future performance. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. Source: FactSet. Important data provider notices and terms available at Total Effect represents the excess return by sector as compared to the index. Performance attribution is calculated in the base currency of the fund. 7. Top Security Contributors and Top Security Detractors are holdings based on the last one month period for rolling months or on the last three months period for quarter end months. These securities do not represent all the securities purchased, sold or recommended for advisory clients, and the reader should not assume that investment in the security listed was or will be profitable. Holdings are subject to change, holdings of the same issuer have been combined. The information provided is not a recommendation to purchase, sell or hold any particular security. The security identified does not represent the Fund s entire holdings and in the aggregate, may represent a small percentage of such holdings. There is no assurance that security purchased will remain in the Fund, or that security sold will not be repurchased. Franklin Templeton International Services, S.à r.l. 8A, rue Albert Borschette L-1246 Luxembourg franklintempleton.lu 2017 Franklin Templeton Investments. 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7 8. 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 securities identified do not represent the fund s entire holdings and in the aggregate may represent only a small percentage of such holdings. There is no assurance that securities purchased will remain in the fund, or that securities sold will not be repurchased. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise be included. 10. 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). Franklin Templeton International Services, S.à r.l. 8A, rue Albert Borschette L-1246 Luxembourg franklintempleton.lu 2017 Franklin Templeton Investments. All rights reserved.