Templeton European Fund A (acc) EUR

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1 Templeton European Fund A (acc) EUR Franklin Templeton Investment Funds Fund Manager Report Value Equity Product Details 1 Fund Assets Fund Inception Date 17/04/1991 Number of Issuers 70 Bloomberg ISIN Base Currency Investment Style Benchmark Morningstar Category Overall Morningstar Rating TM 3 TEMEUAA LX LU EUR Value Europe Large-Cap Value Equity Asset Allocation 2 % Equity Cash & Cash 0.03 Equivalents Fixed Income 0.00 Fund Description The fund aims to achieve long-term capital appreciation by investing primarily in equity securities (common stock) issued by European corporations as well as debt obligations of European corporations and governments. Key Points European equity markets rose in the fourth quarter. A continued improvement in the regional economy and solid corporate earnings helped underpin markets even as inflation remains stubbornly low. Market performance during the period was led by resource sectors (i.e., energy and materials) as the price of key commodities like oil and copper surged to multi-year highs. On the other hand, the utilities and information technology sectors lagged the market. In this environment, the fund underperformed its benchmark index for the quarter, primarily due to stock selection in the materials, financials and information technology sectors. Stock selection in the health care, telecommunication services and consumer discretionary sectors contributed to relative performance for the quarter. The health care sector remains subject to concerns about generic competition, regulatory scrutiny, and a consolidating payer sector, all of which we believe are overstated and addressable. It is rare to find highly cashgenerative, innovative businesses with enormous growth potential trading in deep value territory, but we believe select biotechnology and pharmaceuticals firms offer just such a possible opportunity. Performance Data Discrete Annual Performance (%) as at 31/12/ /16-12/17 12/15-12/16 12/14-12/15 12/13-12/14 12/12-12/13 A (acc) EUR MSCI Europe Index EUR Performance Net of Management Fees as at 31/12/2017 (Dividends Reinvested) (%) 4 1 Mth 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception (03/12/2001) A (acc) EUR MSCI Europe Index Calendar Year Returns (%) 50% 0% -50% % A (acc) EUR Past performance is not an indicator or a guarantee of future performance. Portfolio Manager Insight Market Review European equity markets rose in the fourth quarter. A continued improvement in the regional economy and solid corporate earnings helped underpin markets even as inflation remains stubbornly low. 1. All holdings are subject to change. Holdings of the same issuers have been combined.

2 Economic data from across the region continued to indicate that growth has become more durable, even if inflation remains low. Economic confidence has improved, manufacturing activity has picked up, and loan growth is gaining steam. Better emerging-market growth also was a positive for the region s exporters. The improving regional growth also gave central banks the leeway to move away from extraordinarily loose policy. The US Federal Reserve (Fed) began reducing its balance sheet during the quarter and raised interest rates in December. The Fed anticipates a few more rate hikes in 2018 as the US economy continues to grow. The European Central Bank (ECB), meanwhile, announced that it would halve its monthly asset purchases to 30 billion starting in January 2018, but would extend its bond-buying through September as it waits for inflation to pick up. On the political front, German Chancellor Angela Merkel hit a stumbling block in forming a new coalition, but talks continue with other major German political parties. Meanwhile, the United Kingdom appeared to reach a deal to honour its financial commitments to the European Union, which may allow Brexit talks to move onto trade and other issues. Oil prices rose during the quarter on expectations the Organization of the Petroleum Exporting Countries would extend production cuts through next year. Performance Review Market performance during the period was led by resource sectors (i.e., energy and materials) as the price of key commodities like oil and copper surged to multi-year highs. On the other hand, the utilities and information technology (IT) sectors lagged the market. In this environment, the fund underperformed its benchmark index for the quarter, primarily due to stock selection in the materials, financials and information technology sectors. In the financials sector, the shares of French bank Credit Agricole had outperformed year-to-date, but underperformed in the fourth quarter despite satisfactory third-quarter results. The company has successfully streamlined into a simpler corporate structure after the disposal of minority stakes and now has a narrower international focus. Oxford Instruments, a UK manufacturer of advanced instrumentation equipment, was a top detractor in the IT sector. The shares have come under pressure recently amidst mounting concerns about a lack of organic sales growth. Until the recent weakness, the stock had been a solid performer, re-rating significantly through the first half of We remain positive on management s strategy of refocusing on its core nanotechnology expertise, and see attractive long-term growth prospects in its key end-markets, which include health care, energy, advanced materials and quantum technology. Originally spun out of a laboratory at Oxford University, Oxford Instruments research background offers key insights into the academic applications of its instrumentation technology, as well as associated scalable commercial opportunities. Stock selection in the health care, telecommunication services and consumer discretionary sectors contributed to relative performance for the quarter. Medical technology firm LivaNova continued to benefit from strong operational performance and greater investor confidence in the company s ability to generate sustainable growth. We view LivaNova as one of the most dynamic long-term growth opportunities in the global medtech space. We expect growth will re-accelerate as demand in the recently volatile capital equipment business normalises and the firm continues to progress with key growth products in the cardiovascular and neuromodulation spaces. The company hired a well-respected, veteran CEO and has significant self-help potential and a solid balance sheet with the flexibility to deploy capital and optimise the portfolio. The health care sector more broadly remains subject to concerns about generic competition, regulatory scrutiny, and a consolidating payer sector, all of which we believe are overstated and addressable. It is rare to find highly cash-generative, innovative businesses with enormous growth potential trading in deep value territory, but we believe select biotechnology and pharmaceuticals firms offer just such a possible opportunity. In the consumer discretionary sector, the shares of German auto parts manufacturer ElringKlinger rallied after an analyst upgraded the stock, arguing that investors had excessively punished shares following a recent deterioration in profitability. Recent challenges were largely attributable to capacity bottlenecks and ramp-up costs for new lightweight components, though these issues are being addressed, and we see a credible path to margin recovery in 2018 and beyond. Over the longer term, we believe ElringKlinger s product portfolio places it in a strong competitive position as automakers strive to meet stricter regulatory requirements for reducing CO2 emissions and improving fuel economy. Portfolio Positioning During the period, the portfolio was overweight in the health care, energy, financials and information technology sectors, and underweight in the consumer staples, consumer discretionary and industrials sectors, with no exposure to real estate. Outlook & Strategy We believe that for the first time since the global financial crisis, the European economy appears strong enough to stand on its own, no longer in need of massive central bank support. And with corporate profits still well below their previous peaks and valuations as of year-end looking fair given the more promising economic environment, European equities look to us to be potentially poised for another solid year in A combination of factors is behind the brighter outlook for most European economies, including robust domestic consumption, an end to fiscal austerity and improving credit conditions. Inflation has remained low, but we expect an eventual pickup as the recovery progresses. As inflation begins to rise, we anticipate earnings per share, particularly amongst the more cyclical areas of the market, would likely follow suit over the next few years. We continue to see opportunities in Europe, but we expect stockpicking to become ever more important in One-Month Performance Review European equities advanced modestly in December, capping their best annual gain since 2013 amidst an improving economic expansion and still accommodative policy backdrop. The region ended the year on solid economic footing, with the euro-area seeing the fastest growth of business activity in nearly seven years in December. The fund underperformed its benchmark index for the month, due primarily to holdings in the health care, utilities and financials sectors. An overweight in the energy sector and stock selection in the consumer discretionary sector contributed to relative performance in December. At this point in the cycle, we are finding what we view as the best energy opportunities amongst large, diversified oil producers that pay attractive dividends and trade at valuations that still imply lower for longer oil prices. franklintempleton.lu 2

3 Portfolio Characteristics 5,6 Portfolio Price to Earnings (12 Month Trailing) 17.76x 20.25x Price to Book Value 1.43x 1.91x Price to Cash Flow 6.52x 10.22x Market Capitalisation (Millions in EUR) 43,883 56,587 Dividend Yield 2.81% 3.20% Portfolio Diversification Top Sector Contributors 7,7 Total Sector Effect (%) Health Care 0.23 Telecommunication Services 0.18 Consumer Discretionary 0.14 Energy 0.11 Top Security Contributors 7,8 Security Total Effect (%) LIVANOVA PLC 0.22 DEUTSCHE LUFTHANSA AG 0.20 UCB SA 0.16 ELRINGKLINGER AG 0.14 AEGON NV 0.13 Top Sector Detractors 7,7 Total Sector Effect (%) Materials Financials Information Technology Consumer Staples Utilities Top Security Detractors 7,8 Security Total Effect (%) UNICREDIT SPA RWE AG CREDIT AGRICOLE SA KON BAM GROEP NV GETINGE AB Contributors/detractors data shown is for the period from 01/10/2017 to 31/12/2017. Past performance is not an indicator or a guarantee of future performance. Geographic Weightings vs. 2 United Kingdom Germany France Netherlands Italy Switzerland Belgium Portugal Spain Sweden Norway Ireland Denmark Austria Cash & Cash Equivalents % 25% 50% Sector Weightings vs. 2 Financials Health Care Energy Materials Industrials Information Technology Telecommunication Services Consumer Discretionary Utilities Consumer Staples Real Estate Cash & Cash Equivalents % 5% 10% 15% 20% 25% 30% Templeton European Fund Templeton European Fund franklintempleton.lu 3

4 Top Ten Holdings 9 Top Holdings Sector Country % ROYAL DUTCH SHELL PLC Energy United Kingdom 3.38 GALP ENERGIA SGPS SA Energy Portugal 3.02 BP PLC Energy United Kingdom 2.95 LANXESS AG Materials Germany 2.59 LIVANOVA PLC Health Care Equipment & Services United Kingdom 2.30 BNP PARIBAS SA Banks France 2.29 HSBC HOLDINGS PLC Banks United Kingdom 2.27 SAP SE Software & Services Germany 2.27 AEGON NV Insurance Netherlands 2.21 ENI SPA Energy Italy 2.21 Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) Templeton European Fund Tracking Error (%) Information Ratio Beta Sharpe Ratio Templeton European Fund Investment Team Portfolio Manager Years with Firm Years Experience Dylan Ball, EVP, Portfolio Manager, Research Analyst Heather Arnold, CFA, EVP, Director of Research, Portfolio Manager, Research Analyst Peter Moeschter, CFA, EVP, Portfolio Manager, Research Analyst Templeton Global Equity Team Number of Members Average Years Experience Portfolio Managers/Analysts Research Analysts What Are the Key Risks? 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. Performance may also be affected by currency fluctuations. Currency fluctuations may affect the value of overseas investments. The Fund invests mainly in equity securities of companies located in or doing significant business in European countries. Such securities have historically been subject to significant price movements that may occur suddenly due to market or company-specific factors. As a result, the performance of the Fund can fluctuate significantly over relatively short time periods. Other significant risks include: currency risk, liquidity risk. For full details of all of the risks applicable to this Fund, please refer to the Risk Considerations section of the Fund in the current prospectus of Franklin Templeton Investment Funds. 10. Beta, Information Ratio and Tracking Error information are measured against the. franklintempleton.lu 4

5 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 2. 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. 4. 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. 5. 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. 6. 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. 7. 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. 8. 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 Franklin Templeton International Services, S.à r.l. 8A, rue Albert Borschette L-1246 Luxembourg franklintempleton.lu 2018 Franklin Templeton Investments. All rights reserved.

6 will remain in the Fund, or that security sold will not be repurchased. 9. 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. 11. 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 2018 Franklin Templeton Investments. All rights reserved.