Franklin European Small Mid Cap Growth Fund

Transcription

1 Franklin Templeton Investment Funds Franklin European Small Mid Cap Growth Fund Core Growth Fund Profile Fund Details Inception Date 3 December 2001 Investment Style Benchmark(s) Core Growth MSCI Europe Small-Mid Cap Index FUND OBJECTIVE The Franklin European Small Mid Cap Growth Fund aims to achieve long-term capital appreciation by investing principally in equity and/or equity-related securities of small and mid-cap companies (those with market capitalisations above 100 million and below 8 billion) in Europe. Edwin Lugo, CFA Senior Vice President, Portfolio Manager We bring together our best ideas in a portfolio seeking to generate alpha through the economic cycle. WHY CONSIDER THIS FUND Robust investment philosophy. Our investment approach is based on our philosophy of growth, quality and valuation, supported by in-depth fundamental research. We focus on the rigorous analysis of individual stocks, seeking to identify companies that we believe have a clear competitive advantage, strong balance sheet, solid free cash flow, and a compelling valuation. Our research on each company includes an analysis of the upside potential, as well as an analysis of downside scenarios to help manage risk in the portfolio. Close and strategic monitoring. The Franklin Global Small Cap Team conducts approximately 100 company visits which offer us the opportunity to develop open communication with management teams of companies we consider for investment, as well as companies we own and their competitors. Analysts are keenly focused on achieving quality interaction with management, whether in person at our office, at an off-site location, via conference call, or informally via telephone or . Particularly because we focus on the small cap universe, we invest in companies that offer proprietary products and services. Meetings with management provide an opportunity to review the sustainability of the business model within the context of the current competitive environment and further evaluate future financing needs, corporate governance, accounting principles, internal management objectives, and disciplines and controls. Focus on downside risk. The Franklin Global Small Cap Team maintains a keen focus on downside risk throughout the research process. We believe this is especially important in mitigating the inherent risks both fundamental and valuation-related of investing in smaller capitalization stocks. Key benefits: Avoid companies that will be impacted by shrinking market position, falling revenues or declining profitability. Focus on strong balance sheets and use of scenario analysis help avoid permanent loss of capital. For Professional Investor Use Only. Not for Distribution to Retail Investors.

2 INVESTMENT PHILOSOPHY & PROCESS The Franklin Global Small Cap Team has consistently applied its bottom-up investment strategy, seeking high quality, attractively valued companies across the opportunity set. The team has remained steadfast in its research-driven approach across markets, focused on well-defined and consistent investment criteria. This is an opportunistic, high alpha strategy that is not benchmark-driven, but rather takes a long-term approach to investing. Portfolio weightings are determined by value in the market, rather than weight in the benchmark. Idea Generation and Review of Key Attributes Analysts search a universe of approximately 3,000-4,000 companies with a market capitalisation between 100 million and 8 billion for opportunities that meet our growth, quality, and valuation criteria regardless of sector or domicile. The team believes that a concentrated portfolio of highquality companies with sustainable competitive advantages and strong balance sheets has the potential to produce above-average risk-adjusted returns over the long term. Therefore, the team seeks companies that in their view have: Growth: A clear competitive advantage that provides the potential for a company to survive and prosper over an economic cycle. Quality: Strong balance sheets and free cash flow supported by a management team focused on the creation of shareholder value. Valuation: The investment process includes rigorous valuation analysis to select companies that the team believes are attractively priced. While our bottom-up process emphasises company fundamentals, analysts take political, economic and currency factors into consideration, if needed, to establish their financial forecasts and recommendations. In-Depth Fundamental Research Our investment approach is based on the following factors: Concentrated approach: The typical portfolio includes approximately 25 to 45 companies. We believe that risk can be reduced by understanding the companies in the portfolio in detail. Focus on downside risk: We develop a worst case scenario for each of our companies to understand what can go wrong in terms of sales growth, profitability, and cash generation over the course of our five-year time horizon. This helps us improve our reward to risk ratio by limiting the potential for fundamental deterioration in the business model. Focus on valuation: We use several valuation techniques to establish appropriate buy and sell price targets for each security that discount the key risk factors over a five-year period. Long-term perspective: Our investment horizon is typically between 3-5 years. Our objective is to see past the near-term volatility, which enables us to better assess whether a company will generate value over time. Additionally, we want to give our small company investments the chance to grow into larger companies as a result of what we believe to be a long-term competitive advantage. Analysts dedicate the majority of their time to seeking new investment ideas within their sectors and conducting in-depth coverage of the companies we own. Small cap specialists may spend four to eight weeks deeply investigating a company, as well as its industry and competitors. Both quantitative and qualitative resources support their efforts to identify companies trading at attractive valuations that meet our investment criteria and track the competitive landscape, suppliers, and industries. These include: Several screens aligned with our key metrics help analysts identify companies that meet our growth, quality, and valuation criteria. A capitalisation screen is used at the very onset of the investment process to help identify companies with a market capitalisation between 100 million and 8 billion. A significant percentage of our research ideas stem from our remaining up to date on industry research, attending industry conferences, and maintaining a strong global network of contacts. We attend brokerage-sponsored investment conferences annually at which high level management teams serve as a good source for investment candidates. While we use the information provided by brokerage firms to support idea generation, we do not utilise broker recommendations in our research process. Company visits both with companies we own and their competitors offer us the opportunity to develop open communication with management teams. We can more closely unearth new opportunities and better evaluate our existing investments by visiting companies we own and their competitors. The team leverages the insights and research generated by the broader Franklin Equity Group, which includes approximately 70 investment professionals. This group includes the Franklin Global Large Cap Team in New York, the U.S. Equity Research Team in San Mateo, and the European Equity Research Team in London/Frankfurt. For Professional Investor Use Only. Not for Distribution to Retail Investors. 2

3 While our process emphasizes company fundamentals, analysts may take political, economic and currency factors into consideration at the stock level if appropriate in order to establish their financial forecasts and recommendations. During portfolio construction, the analyst who formally recommended a stock and assigned its rating provides input on the company and shares in-depth sector knowledge. Our senior portfolio manager renders all portfolio decisions based on analysts input. All decisions are made at the individual stock level, with sector and regional weightings a residual of this process. Portfolios are reviewed regularly and discussed at our twice weekly formal team roundtable meetings which serve as a forum for analysts to lead a discussion on each new investment idea and exchange insights and information with the other members of the team. Prior to a stock being Investment Process recommended, the entire team challenges the investment thesis and financial model to help strengthen the recommendation and ensure that a company meets our investment criteria, which is especially important given that we manage a concentrated portfolio. In addition to the ongoing dialogue among the members of the investment team, the lead portfolio manager and analysts are in regular contact with the members of the trading team, who are located in offices around the world. They work closely with traders to monitor liquidity and determine entrance and exit strategies for individual stocks. Small cap markets are more thinly traded, making this collaborative culture particularly beneficial to our process, in our view. Members of the Franklin European and Global Large Cap teams, as well as the trading team, are invited to attend roundtable meetings, adding to the insights and perspectives to the evaluation of a stock. The above chart is for illustration and discussion purposes only. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. PORTFOLIO CONSTRUCTION 1 The fund is benchmark indifferent throughout portfolio construction, considering the most compelling opportunities regardless of industry or domicile. Portfolios include approximately small cap companies that, based on our in-depth analysis, the team believes will generate a minimum 10% return per annum over a five-year period. These companies tend to offer proprietary products and services and have what the team members believe to be longer-term competitive advantages and a high probability of maintaining strong balance sheets and generating cash flow over the long term. Companies are between 100 million and 8 billion market capitalisation. Security: less than 5% of portfolio at the time of investment. Emerging markets: less than 10% of portfolio at the time of investment. Sell Discipline: A stock may be sold and/or potentially dropped from coverage if any of the following occurs: The company reaches its price target. This would reflect when our analysts believe the holding has reached its fair value. A company experiences a change in fundamentals, business model, growth prospects, or management and therefore no longer meets our investment criteria. There may also be a shift in the competitive environment. Target of companies in the portfolio. Industry: less than 35% of portfolio at the time of investment. Analysts identify what we believe to be a more compelling investment opportunity. The investment team continually monitors the investment universe and may For Professional Investor Use Only. Not for Distribution to Retail Investors. 3

4 determine that another opportunity is more attractive based on our investment criteria. RISK MANAGEMENT Limiting downside risk is especially important when investing in small cap companies and the team seeks to manage risk in the portfolio through the following key components of our investment process: In-Depth, Fundamental Analysis: Analysts focus on achieving an in-depth understanding of a company s long-term competitive advantage in order to reduce the risk of selecting an investment that will be impacted by a shrinking market position, falling revenues, and/or declining profitability. Strict Buy and Sell Targets: Analyst use several valuation techniques to establish appropriate buy and sell price targets for each security, discounting the key risk factors over a five-year period. This process helps ensure we own shares when a company s valuation is attractive. We begin to purchase shares as a company reaches its buy target and reduce a position as it nears its sell target i.e., when there is greater risk on the downside. In their research, analysts stress test the valuation and financial models by performing scenario analysis in order to better understand the potential effects of a variety of micro or macro-economic scenarios, including an economic recession, on individual companies. Collaborative Team Structure: The on-going communication among the members of the Franklin Global Small Cap Team, with each investment idea vetted by the entire team and benefiting from our analysts expertise and experience, supports our risk management process by ensuring that companies are evaluated from varying perspectives on a routine basis. During on-going management, the investment team also benefits from regular communication with the Performance Analysis and Investment Risk Group (PAIR). This group works independently of the portfolio management function to oversee and monitor investment risk for all portfolios managed by Franklin Templeton Investments. The team reports directly to the Executive Vice President of Investment Management Strategic Services and is routinely in contact with senior portfolio management to provide data and information on risk within the portfolio. utilize these reports to effectively integrate risk management into the portfolio construction process. Independent Portfolio Risk Monitoring: PAIR further increases risk awareness by quantifying the sources and levels of portfolio risk. As an independent risk management team, PAIR does not have direct reporting lines to portfolio management and conducts periodic reviews of Franklin Templeton Investments portfolios across all asset classes. PAIR suggests methods of effective risk deployment and assists in determining whether portfolio diversification is adequate and whether the appropriate level of risk is being taken to generate excess or incremental returns within prescribed guidelines. In order to ensure that risk and performance data are wellincorporated into portfolio management, PAIR also conducts regular peer reviews. During these formal meetings which are attended by PAIR representatives and investment professionals each portfolio is reviewed at the security, country, and industry levels. In this way, every Franklin European equity portfolio benefits from the expertise and input of the investment team, as well as that of PAIR. PAIR provides the investment team with the following: Portfolio Risk Reports: PAIR plays an active role monitoring risk in portfolios with quantitative analysts producing detailed risk reports with risk metrics that include risk exposures stock, sector, country, and currency positions. The portfolio management team can For Professional Investor Use Only. Not for Distribution to Retail Investors. 4

5 PORTFOLIO MANAGEMENT TEAM Edwin Lugo, CFA Senior Vice President, Portfolio Manager Franklin Equity Group Edwin Lugo is a senior vice president with Franklin Equity Group and the lead portfolio manager for the Franklin Global Small-Cap Team, including European, non-u.s. and global separate accounts and mutual funds. In addition, he researches small- and mid-capitalization companies. Prior to joining Franklin Templeton in 2006, Mr. Lugo was an equity owner and a vice president with Brown Capital, leading growth investing in the International Division. Previously, he was a vice president, research analyst and portfolio manager with Templeton. Mr. Lugo entered the financial services industry in Mr. Lugo holds an M.B.A. in finance from Columbia University. He is a Chartered Financial Analyst (CFA) charterholder, a board member of the CollegeBound Foundation and an alumnus of the Robert A. Toigo Foundation. Julian M. Harper Vice President, Research Analyst Franklin Equity Group Julian Harper is a vice president, research analyst with Franklin Equity Group, where he focuses on global small and mid-capitalization stocks. Mr. Harper joined the firm in April Prior to joining Franklin Templeton Investments, Mr. Harper worked at AXA Private Equity, where he evaluated a number of secondary private equity, mezzanine and coinvestment transactions. Mr. Harper holds a B.A. in economics and political science, graduating Phi Beta Kappa from Swarthmore College. He is a Chartered Financial Analyst and has served as a board trustee of the Carnegie Council for Ethics in International Affairs and board member/treasurer for Sure We Can. Pankaj Nevatia, CFA Vice President, Portfolio Manager, Research Analyst Franklin Equity Group Pankaj Nevatia, CFA, is a vice president, portfolio manager and research analyst for Franklin Equity Group, focusing on global small- and mid-capitalization stocks. Prior to joining Franklin Templeton in 2010, Mr. Nevatia worked in the Global Growth Equities Division at AllianceBernstein and in equity research at Cowen and Company. He entered the financial services industry in Mr. Nevatia holds an M.B.A. from Fordham University, and a postgraduate diploma in computer applications and a B.Com from Bharathiar University in India. He is a Chartered Financial Analyst (CFA) charterholder. For Professional Investor Use Only. Not for Distribution to Retail Investors. 5

6 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 and equity-related securities of small- and mid-cap 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 considerably over time. 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. 1. Limits may change at any time and investors should consult the prospectus of the Fund for guidance on the limits that apply. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of the Luxembourg-domiciled SICAV Franklin Templeton Investment Funds (the Fund ). Nothing in this document should be construed as investment advice. Opinions expressed are the author s at publication date and they are subject to change without prior notice. Subscriptions to shares of the Fund can only be made on the basis of the current prospectus of the Fund and, where available, the relevant Key Investor Information Document, accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter. 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. Past performance is not an indicator or a guarantee of future performance. 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. An investment in the Fund entails risks which are described in the Fund s prospectus and, where available, the relevant Key Investor Information Document. 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. Any research and analysis contained in this document has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund s holding at any one time. Please consult your financial advisor before deciding to invest. A copy of the latest prospectus, and if available for this product the Key Investor Information Document, the annual report and semi-annual report, if published thereafter can be found, on our website or can be obtained, free of charge, from Franklin Templeton International Services S.à r.l. Supervised by the Commission de Surveillance du Secteur Financier - 8A, rue Albert Borschette, L-1246 Luxembourg - Tel: Fax: Issued by Franklin Templeton International Services, S.à r.l. For Professional Investor Use Only. Not for Distribution to Retail Investors. DE Franklin Templeton Investments. All rights reserved.