Franklin Pelagos Commodities Strategy Fund

Transcription

1 Semiannual Report and Shareholder Letter November 30, 2017 Franklin Pelagos Commodities Strategy Fund A SERIES OF FRANKLIN ALTERNATIVE STRATEGIES FUNDS Sign up for electronic delivery at franklintempleton.com/edelivery

2 Franklin Templeton Investments Gain From Our Perspective At Franklin Templeton Investments, we re dedicated to one goal: delivering exceptional asset management for our clients. By bringing together multiple, world-class investment teams in a single firm, we re able to offer specialized expertise across styles and asset classes, all supported by the strength and resources of one of the world s largest asset managers. This has helped us to become a trusted partner to individual and institutional investors across the globe. Dear Fellow Shareholder: During the six months ended November 30, 2017, generally upbeat economic data, encouraging corporate earnings and a supportive monetary policy were positives for US securities markets. At its June meeting, the US Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% to 1.00% 1.25% amid signs of a growing US economy. The 10-year US Treasury yield began the period at 2.21% and ended the period at 2.42%. Commodities, as measured by the Bloomberg Commodity Index, posted a +4.04% total return during the six-month period, aided by a weak US dollar and strong global growth. 1 A couple of weeks after the end of the reporting period, the Fed raised its target range a quarter point to 1.25% 1.50% amid ongoing labor market strength and rising economic activity in the US. The Fed s inflation outlook remained essentially the same. We are committed to our long-term perspective and disciplined investment approach as we conduct a rigorous, fundamental analysis of securities with a regular emphasis on investment risk management. We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today s markets and encourage investors to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well-diversified portfolio and a patient, long-term outlook should be well positioned for the years ahead. On the following pages, the Fund s portfolio management team reviews investment decisions made during the past six months in light of the economic environment and other factors. Please remember all securities markets fluctuate, as do mutual fund share prices. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to continuing to serve your investment needs. Sincerely, Madison S. Gulley, CFA President and Chief Executive Officer Investment Management Franklin Alternative Strategies Funds This letter reflects our analysis and opinions as of November 30, 2017, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable. CFA is a trademark owned by CFA Institute. 1. Source: Morningstar. See for additional data provider information. Not FDIC Insured May Lose Value No Bank Guarantee franklintempleton.com Not part of the semiannual report 1

3 Contents Semiannual Report Franklin Pelagos Commodities Strategy Fund... 3 Performance Summary... 7 Your Fund's Expenses... 9 Consolidated Financial Highlights and Consolidated Statement of Investments Consolidated Financial Statements Notes to Consolidated Financial Statements Shareholder Information Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools. 2 Semiannual Report franklintempleton.com

4 Semiannual Report Franklin Pelagos Commodities Strategy Fund We are pleased to bring you Franklin Pelagos Commodities Strategy Fund s semiannual report for the period ended November 30, Your Fund s Goal and Main Investments The Fund seeks long-term total return by providing exposure to the commodities markets. It invests mainly in commoditylinked derivative instruments and securities of the US government, its agencies and instrumentalities and other fixed income securities. Performance Overview The Fund s Class A shares delivered a +4.58% cumulative total return for the six months under review. In comparison, the benchmark Bloomberg Commodity Index, which measures performance of exchange-traded futures contracts on physical commodities, posted a +4.04% total return for the same period. 1 You can find more of the Fund s performance data in the Performance Summary beginning on page 7. Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) What is a futures contract? A futures contract is an agreement between the Fund and a counterparty made through a US or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price onafuturedate. Economic and Market Overview The US economy grew during the six months under review. The economy strengthened in 2017 s third quarter compared to the second quarter largely due to growth in consumer spending across goods and services, business and inventory investment, as well as net exports due to lower imports. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 4.3% in May 2017, as reported at the beginning of the six-month period, to 4.1% at period-end. 2 Monthly retail sales were volatile but positive on average during the period. Annual inflation, as measured by the Consumer Price Index, increased from 1.9% in May 2017, as reported at the beginning of the period, to 2.2% at period-end. 2 At its June meeting, the US Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% to 1.00% 1.25%, amid signs of a growing US economy, strengthening labor market and improving business spending. At its subsequent meetings, the Fed kept its target range unchanged. However, minutes of its October 31 November 1 meeting indicated that the Fed continued to maintain a positive outlook for the US economy and signaled the possibility of a third rate hike in 2017, though concerns about the ongoing softness in inflation remained. US equity markets rose during the period, benefiting from mostly upbeat economic data and better US corporate earnings. The markets were also supported by investor optimism arising from the US Fed chair s comments indicating optimism about the US economy and the likelihood of gradual rate hikes. Furthermore, the Senate s approval of a budget plan in October and its subsequent vote near period-end to begin debate on a tax reform bill raised expectations for reforms and aided equity markets. However, tensions between the US and North Korea and uncertainty surrounding US health care and tax reform plans curbed market sentiment at times. Nevertheless, the broad US stock market, as measured by the Standard & Poor s 500 Index, generated a % total return for the period. 1 Commodity prices, as measured by the Bloomberg Commodity Index, delivered a positive return during the period, aided by a weak US dollar and strong global growth. Despite some volatility, oil prices rose, helped by positive global demand trends and geopolitical tensions surrounding the Middle East. 1. Source: Morningstar. The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund s portfolio. 2. Source: Bureau of Labor Statistics. See for additional data provider information. The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund s Consolidated Statement of Investments (SOI). The Consolidated SOI begins on page 15. franklintempleton.com Semiannual Report 3

5 FRANKLIN PELAGOS COMMODITIES STRATEGY FUND Oil prices were also aided by the extension of previously agreed-upon supply curtailments through the end of 2018 by the Organization of the Petroleum Exporting Countries (OPEC) and its partners, including Russia. Gold prices rose marginally as concerns surrounding North Korea s missile program were partially offset by growing expectations for a Fed rate hike in December Metal prices generally rose, buoyed by favorable global economic conditions. Among agricultural commodities, prices of soybeans and sugar rose, while those of corn and wheat declined. Investment Strategy We utilize an actively managed fundamental and quantitative investment process to provide exposure to a variety of commodity sectors and indexes by investing in commoditylinked derivative instruments including commodity-linked total return swaps, commodity futures, commodity index futures and options on commodity futures and commodity index futures, which may provide exposure to foreign and emerging markets. By investing in these derivative instruments, we seek to gain exposure to the returns of real assets that trade in the commodities markets without direct investment in physical commodities. Real assets include such things as industrial and precious metals, gas, oil, livestock, agricultural or meat products and other items. What is a swap agreement? A swap agreement, such as a commodity-linked total return swap, is a contract between the Fund and a counterparty to exchange on a future date the returns, or differentials in return, that would have been earned or realized if a notional amount were invested in specific instruments. What is an option? An option is a contract to buy or sell a specific financial product known as the option s underlying instrument at a specific price. The buyer of an option has the right, but not the obligation, to buy or sell the underlying instrument at or until a specified expiration date. Conversely, the seller ( writer ) of an option who opens a transaction is obligated to buy or sell the underlying instrument should the option holder exercise that right. Manager s Discussion During its semiannual period, the Fund obtained its commodities exposure through swaps on commodity indexes and through commodities futures and options on commodities futures. The asset coverage for this exposure was met by the Portfolio Composition* 11/30/17 % of Consolidated Net Assets U.S. Treasury Bill 83.5% FFCB 9.0% FHLMC 7.7% Institutional Fiduciary Trust Money Market Portfolio 4.4% Other Assets, less Liabilities** -4.6% See Abbreviations on page 31. *Portfolio composition figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. **Includes unrealized appreciation/depreciation on open commodity futures and swap contracts, as well as other assets and liabilities. See supplementary commodity exposure tables on page 5 for additional information related to the Fund s economic exposure to commodities. Fund s investments in US Treasury bills and other fixed income securities. During the period, the Fund had positive contributions to performance from oil and oil products, industrial metals, and soybean products. Performance benefited from the returns of these economically sensitive commodities. Crude oil and oil products such as gasoline and diesel traded higher as OPEC and non-opec producers kept some production off the market. Industrial metals were stronger as a group due to Chinese and global demand growth expectations as well as anticipation for slower supply growth. The soybean complex (soybeans, soybean meal and soybean oil) was stronger due to improved processing margins in China and strong US exports of soybeans. Additionally, the US dollar moved lower against most foreign currencies over the period. The Fund outperformed its benchmark, the Bloomberg Commodity Index, during the period primarily due to active management in energy, agriculture and livestock. In the energy sector, crude oil prices moved higher over the period as compliance to the supply reduction pact among OPEC and non-opec countries remained strong. US inventories of crude oil declined more than their expected seasonal pace, even with withdrawals from the Strategic Petroleum Reserve. Oil products traded stronger, helped by US refinery disruptions due to a powerful Atlantic hurricane season. US inventory levels of gasoline and distillate fuels declined at a strong pace. Returns from US natural gas were negative despite inventories moving from a surplus to their historical seasonal average to a deficit. US production of natural gas increased, as the Appalachian region continued to be dominant and other shale natural gas sources demonstrated strong production growth. Demand for natural gas slipped due to cooler summer weather and hurricane disruption, and heating 4 Semiannual Report franklintempleton.com

6 FRANKLIN PELAGOS COMMODITIES STRATEGY FUND demand had a slower-than-average start. Relative to its benchmark, the Fund s returns from crude oil and natural gas fueled energy outperformance. In metals, returns of industrial metals were positive, while returns from precious metals were negative over the period. Nickel returns were highest among the industrial metals in the Fund s benchmark, followed by zinc, copper and aluminum. Strong stainless steel prices helped nickel returns, as stainless steel represents a major share of nickel demand, and the supply/demand balance of zinc continued to be in a global deficit due to production curtailments. Industrial metals were buffeted by strong Chinese growth expectations as well as strong industrial production growth in the eurozone and the US. Additionally, global purchasing manager indexes continued to signal expansionary conditions. However, inflation indicators underwhelmed market consensus over most of the period, which created a headwind to precious metals returns. Gold holdings of exchanged-traded funds increased modestly, whereas silver holdings decreased modestly, underscoring the lower returns of silver. Relative to its benchmark, the Fund s returns from metals lagged due to positioning in industrial metals. In agriculture and livestock, positive returns came from the soybean complex. Other agricultural and livestock commodities generated negative returns over the period. China soybean processing margins rose to seasonal levels and above, which encouraged imports of soybeans. Strong exports were the primary reason for the US Department of Agriculture s (USDA s) tighter projected US supply of soybeans than was projected in May The USDA s US corn yield estimates increased almost five percentage points since May and the resulting higher production forecast was the primary reason for a higher supply forecast for the US corn crop. Wheat prices struggled against the backdrop of strong Russian production and exports. Relative to its benchmark, the Fund s agriculture and livestock holdings outperformed, driven by positioning in corn and live cattle. Fund Exposure to Commodities The following table summarizes the Fund s economic exposure to commodities derived through its investment in commoditylinked total return swap contracts. At November 30, 2017, the Fund s exposure based on notional value represented 80.6% of consolidated net assets. Commodity-Linked Total Return Swap Exposure* % of Consolidated Net Assets Long Gold 11.8% Corn 9.7% Copper 8.8% Soybeans 5.6% Aluminum 5.3% Natural Gas 5.2% Live Cattle 5.0% Unleaded Gasoline 3.8% Nickel 3.7% WTI Crude Oil 3.2% Zinc 3.1% Soybean Meal 2.9% Soybean Oil 2.6% Sugar 2.3% Heating Oil 2.2% Coffee 2.0% Silver 2.0% Cotton 1.4% *Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. The Fund s exposure was calculated using the commodity sector weightings of the FP Custom Master Index multiplied by the Fund s percentage notional exposure. The following table summarizes the Fund s economic exposure to commodities derived through its investment in futures contracts. At November 30, 2017, the Fund s exposure based on notional value represented 19.7% of consolidated net assets. Commodity Futures Exposure* % of Consolidated Net Assets Long Brent Crude Oil 8.2% Corn 2.5% Natural Gas 1.9% RBOB Gasoline 1.9% Gold 100 Oz 1.9% Live Cattle 1.3% Cotton 1.0% Sugar 1.0% *Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. franklintempleton.com Semiannual Report 5

7 FRANKLIN PELAGOS COMMODITIES STRATEGY FUND Thank you for your participation in Franklin Pelagos Commodities Strategy Fund. We look forward to continuing to serve your financial needs. Stephen P. Burke Stephen P. Burke is an executive vice president and co-founder of Franklin Alternative Strategies Advisers, LLC., formerly known as Pelagos Capital Management, LLC ("Pelagos"). Mr. Burke has over 30 years of investment experience across multiple asset classes and has been managing multi-alternative and commodity strategies since Prior to founding Pelagos, Mr. Burke worked at State Street Global Advisors for 10 years during which time he was the senior global strategist, head of global strategic asset allocation, and head of taxable fixed income. Mr. Burke earned a B.S. from the Carroll School of Management at Boston College. John C. Pickart, CFA Wayne D. Ryan, CAIA John C. Pickart is an executive vice president, chief financial officer and co-founder of Franklin Alternative Strategies Advisers, LLC., formerly known as Pelagos Capital Management, LLC. Mr. Pickart has over 29 years of investment experience across multiple alternative and commodity strategies since Prior to founding Pelagos, Mr. Pickart worked at State Street Global Advisors for six years during which time he managed small-cap and mid-cap equity portfolios. Mr. Pickart earned an M.B.A. from the University of Chicago Booth School of Business and a B.S. from the University of Tampa. He is a Chartered Financial Analyst (CFA) charterholder. Portfolio Management Team The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2017, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy. Wayne D. Ryan is a research analyst and portfolio manager of Franklin Alternative Strategies Advisers, LLC, formerly known as Pelagos Capital Management, LLC ( Pelagos ). Mr. Ryan has over 15 years of investment and trading experience across multiple asset classes and has been managing multi-alternative and commodity strategies since He has been a member of the Pelagos team since January Prior to joining Pelagos, Mr. Ryan s experience was highlighted by eight years of proprietary equity trading. Mr. Ryan earned an M.B.A. from the Carroll School of Management at Boston College and an A.B. from Harvard College. Mr. Ryan holds the Chartered Alternative Investment Analyst designation. He is a Chartered Financial Analyst (CFA) charterholder. 6 Semiannual Report franklintempleton.com

8 FRANKLIN PELAGOS COMMODITIES STRATEGY FUND Performance Summary as of November 30, 2017 The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund s dividends and capital gain distributions, if any, and any unrealized gains or losses. Your dividend income will vary depending on dividends or interest paid by securities in the Fund s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. Performance as of 11/30/17 1 Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com. Share Class Cumulative Total Return 2 Average Annual Total Return 3 A 6-Month +4.58% -1.39% 1-Year -0.31% -6.02% 3-Year % -9.03% Since Inception (1/10/14) % -9.46% Advisor 6-Month +4.63% +4.63% 1-Year 0.00% 0.00% 5-Year % -8.62% Since Inception (12/7/11) % -6.83% Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) See page 8 for Performance Summary footnotes. franklintempleton.com Semiannual Report 7

9 FRANKLIN PELAGOS COMMODITIES STRATEGY FUND PERFORMANCE SUMMARY Total Annual Operating Expenses 4 Share Class With Waiver Without Waiver A 1.20% 1.91% Advisor 0.95% 1.66% Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus. All investments involve risks, including possible loss of principal. Investing in physical commodities, either directly or through derivative instruments such as commodity-linked total return swaps, commodity futures, commodity index futures and options on commodity futures and commodities index futures, presents unique risks, is speculative and can be extremely volatile. Market prices of commodities may fluctuate rapidly based on numerous factors, including: changes in supply and demand relationships; weather; agriculture; trade; domestic and foreign political and economic events and policies; diseases; pestilence; technological developments; currency exchange rate fluctuations; and monetary and other governmental policies, action and inaction. Derivative instruments involve costs and can create leverage in the Fund s portfolio, which may result in significant volatility and cause the Fund to participate in losses (as well as gains) in an amount that significantly exceeds the Fund s initial investment. The Fund may not achieve the anticipated benefits and may realize losses, which could be significant. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund s share price may decline. Foreign investing carries additional risks such as currency and market volatility and political, social and economic instability, risks which are heightened in less developed or emerging market countries. The Fund is actively managed but there is no guarantee that the manager s investment decisions will produce the desired results. The Fund s prospectus also includes a description of the main investment risks. 1. The Fund has an expense reduction contractually guaranteed through 9/30/18 and a fee waiver related to the management fee paid by a subsidiary. The Fund also has a fee waiver associated with any investments it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund. Fund investment results reflect the expense reduction and fee waivers; without these reductions, the results would have been lower. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized. 4. Figures are as stated in the Fund s current prospectus and may differ from the expense ratios disclosed in the Your Fund s Expenses and Consolidated Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 8 Semiannual Report franklintempleton.com

10 FRANKLIN PELAGOS COMMODITIES STRATEGY FUND Your Fund s Expenses As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. Actual Fund Expenses The table below provides information about actual account values and actual expenses in the columns under the heading Actual. In these columns the Fund s actual return, which includes the effect of Fund expenses, is used to calculate the Ending Account Value for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings Actual and Expenses Paid During Period (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $ Hypothetical Example for Comparison with Other Funds Under the heading Hypothetical in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading Hypothetical is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher. Share Class Beginning Account Value 6/1/17 Actual (actual return after expenses) Ending Account Value 11/30/17 Expenses Paid During Period 6/1/17 11/30/17 1,2 Hypothetical (5% annual return before expenses) Ending Account Value 11/30/17 Expenses Paid During Period 6/1/17 11/30/17 1,2 Net Annualized Expense Ratio 2 A $1,000 $1, $6.15 $1, $ % C $1,000 $1, $9.97 $1, $ % R $1,000 $1, $7.23 $1, $ % R6 $1,000 $1, $3.39 $1, $ % Advisor $1,000 $1, $4.87 $1, $ % 1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above in the far right column multiplied by the simple average account value over the period indicated, and then multiplied by 183/365 to reflect the one-half year period. 2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses. franklintempleton.com Semiannual Report 9

11 Consolidated Financial Highlights Franklin Pelagos Commodities Strategy Fund Class A Six Months Ended November 30, 2017 (unaudited) Year Ended May 31, a Per share operating performance (for a share outstanding throughout the period) Net asset value, beginning of period.... $ 6.12 $ 6.47 $ 7.12 $ 9.44 $ 8.88 Income from investment operations b : Net investment income (loss) c... (0.01) (0.04) (0.08) (0.09) (0.08) Net realized and unrealized gains (losses) (0.31) (0.57) (2.23) 0.64 Total from investment operations (0.35) (0.65) (2.32) 0.56 Net asset value, end of period... $6.40 $6.12 $6.47 $7.12 $9.44 Total return d % (5.41)% (9.13)% (24.58)% 6.31% Ratios to average net assets e Expenses before waiver and payments by affiliates and expense reduction % 1.71% 2.14% 2.05% 3.38% Expenses net of waiver and payments by affiliates and expense reduction f % 1.20% 1.21% 1.25% 1.25% Netinvestmentincome(loss)... (0.31)% (0.61)% (0.79)% (0.94)% (0.94)% Supplemental data Net assets, end of period (000 s)... $5,191 $4,846 $3,814 $2,080 $601 Portfolio turnover rate... % 42.22% 28.03% 62.10% 34.28% afor the period January 10, 2014 (commencement of operations) to May 31, b The amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund. c Based on average daily shares outstanding. dtotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. eratios are annualized for periods less than one year. f Benefit of expense reduction rounds to less than 0.01%. 10 Semiannual Report The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

12 CONSOLIDATED FINANCIAL HIGHLIGHTS Franklin Pelagos Commodities Strategy Fund (continued) Class C Six Months Ended November 30, 2017 (unaudited) Year Ended May 31, a Per share operating performance (for a share outstanding throughout the period) Net asset value, beginning of period.... $ 5.97 $ 6.36 $ 7.05 $ 9.41 $ 8.88 Income from investment operations b : Net investment income (loss) c... (0.03) (0.10) (0.16) (0.15) (0.09) Net realized and unrealized gains (losses) (0.29) (0.53) (2.21) 0.62 Total from investment operations (0.39) (0.69) (2.36) 0.53 Net asset value, end of period... $6.21 $5.97 $6.36 $7.05 $9.41 Total return d % (6.13)% (9.79)% (25.08)% 5.97% Ratios to average net assets e Expenses before waiver and payments by affiliates and expense reduction % 2.46% 2.88% 2.75% 4.08% Expenses net of waiver and payments by affiliates and expense reduction f % 1.95% 1.95% 1.95% 1.95% Netinvestmentincome(loss)... (1.06)% (1.36)% (1.53)% (1.64)% (1.64)% Supplemental data Net assets, end of period (000 s)... $981 $963 $862 $377 $60 Portfolio turnover rate... % 42.22% 28.03% 62.10% 34.28% afor the period January 10, 2014 (commencement of operations) to May 31, b The amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund. c Based on average daily shares outstanding. dtotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. eratios are annualized for periods less than one year. f Benefit of expense reduction rounds to less than 0.01%. franklintempleton.com The accompanying notes are an integral part of these consolidated financial statements. Semiannual Report 11

13 CONSOLIDATED FINANCIAL HIGHLIGHTS Franklin Pelagos Commodities Strategy Fund (continued) Class R Six Months Ended November 30, 2017 (unaudited) Year Ended May 31, a Per share operating performance (for a share outstanding throughout the period) Net asset value, beginning of period.... $ 6.08 $ 6.44 $ 7.10 $ 9.44 $ 8.88 Income from investment operations b : Net investment income (loss) c... (0.02) (0.05) (0.06) (0.10) (0.06) Net realized and unrealized gains (losses) (0.31) (0.60) (2.24) 0.62 Total from investment operations (0.36) (0.66) (2.34) 0.56 Net asset value, end of period... $6.35 $6.08 $6.44 $7.10 $9.44 Total return d % (5.59)% (9.30)% (24.79)% 6.31% Ratios to average net assets e Expenses before waiver and payments by affiliates and expense reduction % 1.85% 2.34% 2.27% 3.58% Expenses net of waiver and payments by affiliates and expense reduction f % 1.34% 1.41% 1.47% 1.45% Netinvestmentincome(loss)... (0.52)% (0.75)% (0.99)% (1.16)% (1.14)% Supplemental data Net assets, end of period (000 s)... $24 $23 $9 $4 $5 Portfolio turnover rate... % 42.22% 28.03% 62.10% 34.28% afor the period January 10, 2014 (commencement of operations) to May 31, b The amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund. c Based on average daily shares outstanding. dtotal return is not annualized for periods less than one year. eratios are annualized for periods less than one year. f Benefit of expense reduction rounds to less than 0.01%. 12 Semiannual Report The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

14 CONSOLIDATED FINANCIAL HIGHLIGHTS Franklin Pelagos Commodities Strategy Fund (continued) Class R6 Six Months Ended November 30, 2017 (unaudited) Year Ended May 31, a Per share operating performance (for a share outstanding throughout the period) Net asset value, beginning of period.... $6.21 $ 6.53 $ 7.16 $ 9.46 $ 8.88 Income from investment operations b : Net investment income (loss) c (0.01) (0.02) (0.04) (0.03) Net realized and unrealized gains (losses) (0.31) (0.61) (2.26) 0.61 Total from investment operations (0.32) (0.63) (2.30) 0.58 Net asset value, end of period... $6.51 $6.21 $6.53 $7.16 $9.46 Total return d % (4.90)% (8.80)% (24.31)% 6.53% Ratios to average net assets e Expenses before waiver and payments by affiliates and expense reduction % 1.02% 1.10% 1.53% 1.58% Expenses net of waiver and payments by affiliates and expense reduction f % 0.70% 0.76% 0.86% 0.86% Netinvestmentincome(loss) % (0.11)% (0.34)% (0.55)% (0.55)% Supplemental data Net assets, end of period (000 s)... $122,163 $118,839 $131,500 $53,068 $67,732 Portfolio turnover rate... % 42.22% 28.03% 62.10% 34.28% afor the period January 10, 2014 (commencement of operations) to May 31, b The amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund. c Based on average daily shares outstanding. dtotal return is not annualized for periods less than one year. eratios are annualized for periods less than one year. f Benefit of expense reduction rounds to less than 0.01%. franklintempleton.com The accompanying notes are an integral part of these consolidated financial statements. Semiannual Report 13

15 CONSOLIDATED FINANCIAL HIGHLIGHTS Franklin Pelagos Commodities Strategy Fund (continued) Advisor Class Six Months Ended November 30, 2017 (unaudited) Year Ended May 31, Per share operating performance (for a share outstanding throughout the period) Net asset value, beginning of period... $ 6.26 $ 6.60 $ 7.25 $ 9.58 $ 9.43 $ 9.15 Income from investment operations a : Net investment income (loss) b... (0.01) (0.03) (0.09) (0.07) (0.05) (0.08) Net realized and unrealized gains (losses) (0.31) (0.56) (2.26) Total from investment operations (0.34) (0.65) (2.33) Less distributions from net investment income. ( ) c Net asset value, end of period... $6.55 $6.26 $6.60 $7.25 $9.58 $9.43 Total return d % (5.15)% (8.97)% (24.32)% 1.59% 3.06% Ratios to average net assets e Expenses before waiver and payments by affiliates and expense reduction % 1.46% 1.88% 1.75% 1.88% 1.14% Expenses net of waiver and payments by affiliates and expense reduction % f 0.95% f 0.95% f 0.95% f 1.04% f 1.10% Netinvestmentincome(loss)... (0.06)% (0.36)% (0.53)% (0.64)% (0.70)% (0.76)% Supplemental data Net assets, end of period (000 s)... $881 $2,062 $675 $248 $126 $107,853 Portfolio turnover rate.... % 42.22% 28.03% 62.10% 34.28% 21.47% athe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund. bbased on average daily shares outstanding. c Amount rounds to less than $0.01 per share. dtotal return is not annualized for periods less than one year. eratios are annualized for periods less than one year. f Benefit of expense reduction rounds to less than 0.01%. 14 Semiannual Report The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

16 Consolidated Statement of Investments, November 30, 2017 (unaudited) Franklin Pelagos Commodities Strategy Fund Principal Amount U.S. Government and Agency Securities 15.4% FFCB,0.96%,7/27/18... $10,000,000 $ 9,961,440 FHLMC,1.25%,7/26/ ,000,000 9,905,960 Total U.S. Government and Agency Securities (Cost $20,000,000)... 19,867,400 Short Term Investments 89.2% U.S. Government and Agency Securities 84.8% a,bffcb,12/01/ ,675,000 1,675,000 b U.S. Treasury Bill, a,c1/04/ ,000,000 12,986,525 a 4/12/ ,000,000 12,927,369 5/24/ ,100,000 11,025,024 7/19/ ,900,000 19,716,126 8/16/ ,500,000 9,398,556 10/11/ ,500,000 41,922,180 Total U.S. Government and Agency Securities (Cost $109,783,571) ,650,780 Total Investments before Money Market Funds (Cost $129,783,571) ,518,180 Value Shares Money Market Funds (Cost $5,615,709) 4.4% d,e InstitutionalFiduciaryTrustMoneyMarketPortfolio,0.75%... 5,615,709 5,615,709 Total Investments (Cost $135,399,280) 104.6% ,133,889 f Other Assets, less Liabilities (4.6)%... (5,893,576) Net Assets 100.0%... $129,240,313 aa portion or all of the security is owned by FPC Holdings Corp., a wholly-owned subsidiary of the Fund. See Note 1(c). b The security was issued on a discount basis with no stated coupon rate. ca portion or all of the security has been segregated as collateral for open futures contracts. At November 30, 2017, the value of this security and/or cash pledged amounted to $1,548,393, representing 1.2% of net assets. dsee Note 3(f) regarding investments in affiliated management investment companies. ethe rate shown is the annualized seven-day yield at period end. f Includes unrealized appreciation/depreciation on open commodity futures and swap contracts, as well as other assets and liabilities. franklintempleton.com Semiannual Report 15

17 CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED) Franklin Pelagos Commodities Strategy Fund (continued) At November 30, 2017, the Fund had the following futures contracts outstanding. See Note 1(b). Futures Contracts a Description Type Number of Contracts Notional Amount* Expiration Date Value/ Unrealized Appreciation (Depreciation) Commodity Contracts BrentCrudeOil... Long 169 $10,584,470 12/28/17 $ (62,951) Corn... Long 182 3,237,325 3/14/18 19,838 Cotton... Long 36 1,310,580 3/07/18 (11,468) Gold100Oz... Long 19 2,425,730 2/26/18 (18,109) LiveCattle... Long 34 1,699,660 2/28/18 (22,219) NaturalGas... Long 82 2,480,500 12/27/17 (126,538) RBOBGasoline... Long 34 2,470,440 12/29/17 (5,676) Sugar... Long 75 1,266,720 2/28/ TotalFuturesContracts... $(226,549) *As of period end. At November 30, 2017, the Fund had the following commodity-linked total return swap contracts outstanding. See Note 1(b). Commodity-Linked Total Return Swap Contracts a Underlying Instruments Pay Fixed Rate Payment Frequency Counterparty Maturity Date Notional Value Value/ Unrealized Appreciation (Depreciation) OTC Swap Contracts Long b FP Custom Master Index c % Atmaturity MSCS 1/05/18 $104,172,595 $(927,405) a A portion or all of the contract is owned by FPC Holdings Corp., a wholly-owned subsidiary of the Fund. See Note 1(c). bthe Fund receives the total return on the underlying instrument and pays a fixed financing rate. crepresents a custom index comprised of a basket of underlying instruments. Additional information regarding the underlying instruments and their respective values including fees are as follows: Underlying Instruments Notional Value d Notional Value e Percentage of Value/ Unrealized Appreciation (Depreciation) BloombergCommodityAluminumSubindex... $ 6,875, % $(70,731) BloombergCommodityCoffeeSubindex... 2,604, % (73,547) Bloomberg Commodity Copper Subindex... 11,354, % (16,868) BloombergCommodityCornSubindex... 12,604, % 80,833 BloombergCommodityCottonSubindex... 1,770, % (15,097) BloombergCommodityGoldSubindex... 15,209, % (113,422) BloombergCommodityHeatingOilSubindex... 2,812, % (38,661) BloombergCommodityLiveCattleSubindex... 6,458, % (83,675) BloombergCommodityNaturalGasSubindex... 6,771, % (330,771) BloombergCommodityNickelSubindex... 4,791, % (172,961) 16 Semiannual Report franklintempleton.com

18 CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED) Franklin Pelagos Commodities Strategy Fund (continued) Commodity-Linked Total Return Swap Contracts a (continued) Underlying Instruments Notional Value d Notional Value e Percentage of Value/ Unrealized Appreciation (Depreciation) BloombergCommoditySilverSubindex... $ 2,604, % $(13,818) Bloomberg Commodity Soybean Meal Subindex 3 Month Forward.... 3,750, % (7,973) Bloomberg Commodity Soybean Oil Subindex 3 Month Forward... 3,333, % (23,415) Bloomberg Commodity Soybeans Subindex 3 Month Forward... 7,187, % (42,929) BloombergCommoditySugarSubindex... 3,021, % 2,005 Bloomberg Commodity Unleaded Gasoline Subindex... 4,896, % (11,139) BloombergCommodityWTICrudeOilSubindex... 4,166, % 7,316 BloombergCommodityZincSubindex... 3,958, % (2,552) Total... $104,172, % $(927,405) dnotional value represents the fair value at period end of each underlying instrument (including the financing rate fee which is calculated based on the swap contract s original notional value of $105,100,000, allocated to each underlying instrument on a pro-rata basis). e Represents the weighting of the component in the custom index. See Abbreviations on page 31. franklintempleton.com The accompanying notes are an integral part of these consolidated financial statements. Semiannual Report 17

19 Consolidated Financial Statements Consolidated Statement of Assets and Liabilities November 30, 2017 (unaudited) Franklin Pelagos Commodities Strategy Fund Assets: Investments in securities: Cost - Unaffiliated issuers... $129,783,571 Cost - Non-controlled affiliates (Note 3f)... 5,615,709 Value - Unaffiliated issuers... $129,518,180 Value - Non-controlled affiliates (Note 3f)... 5,615,709 Receivables: Capital shares sold... 8,741 Interest... 75,856 Affiliates... 2,212 Other assets Total assets ,220,720 Liabilities: Payables: Capital shares redeemed... 6,121 Managementfees... 46,261 Distributionfees... 1,918 Variationmarginonfuturescontracts ,944 Duetobrokers ,347 Funds advanced by custodian.... 4,122,955 UnrealizeddepreciationonOTCswapcontracts ,405 Accrued expenses and other liabilities... 55,456 Total liabilities... 5,980,407 Net assets, at value.... $129,240,313 Net assets consist of: Paid-incapital... $124,507,305 Undistributednetinvestmentincome... 23,770 Netunrealizedappreciation(depreciation)... (1,419,345) Accumulatednetrealizedgain(loss)... 6,128,583 Net assets, at value.... $129,240, Semiannual Report The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

20 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Assets and Liabilities (continued) November 30, 2017 (unaudited) Franklin Pelagos Commodities Strategy Fund Class A: Net assets, at value.... $ 5,191,476 Sharesoutstanding ,740 Net asset value per share a... $6.40 Maximum offering price per share (net asset value per share 94.25%)... $6.79 Class C: Net assets, at value.... $ 980,915 Sharesoutstanding ,865 Net asset value and maximum offering price per share a... $6.21 Class R: Net assets, at value.... $ 24,159 Sharesoutstanding... 3,806 Net asset value and maximum offering price per share... $6.35 Class R6: Net assets, at value.... $122,163,232 Sharesoutstanding... 18,770,181 Net asset value and maximum offering price per share... $6.51 Advisor Class: Net assets, at value.... $ 880,531 Sharesoutstanding ,498 Net asset value and maximum offering price per share... $6.55 aredemption price is equal to net asset value less contingent deferred sales charges, if applicable. franklintempleton.com The accompanying notes are an integral part of these consolidated financial statements. Semiannual Report 19

21 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Operations for the six months ended November 30, 2017 (unaudited) Franklin Pelagos Commodities Strategy Fund Investment income: Dividends: Non-controlled affiliates (Note 3f)... $ 2,271 Interest: Unaffiliated issuers ,381 Totalinvestmentincome ,652 Expenses: Managementfees(Note3a) ,211 Distribution fees: (Note 3c) ClassA... 6,240 ClassC... 4,856 ClassR Transfer agent fees: (Note 3e) ClassA... 10,922 ClassC... 2,122 ClassR ClassR6... 2,112 AdvisorClass... 4,583 Custodianfees(Note4) Reports to shareholders ,802 Registration and filing fees... 44,332 Professional fees... 29,527 Trustees feesandexpenses... 21,669 Other... 8,255 Total expenses ,228 Expensereductions(Note4)... (551) Expenses waived/paid by affiliates (Note 3f and 3g)... (244,283) Netexpenses ,394 Net investment income ,258 Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ,284 Writtenoptions ,682 Futurescontracts... 2,901,516 Swap contracts... 2,894,319 Netrealizedgain(loss)... 6,302,801 Net change in unrealized appreciation (depreciation) on: Investments: Unaffiliated issuers... 15,625 Writtenoptions... (140,832) Futurescontracts ,369 Swap contracts... (927,405) Netchangeinunrealizedappreciation(depreciation)... (436,243) Netrealizedandunrealizedgain(loss)... 5,866,558 Netincrease(decrease)innetassetsresultingfromoperations... $5,991, Semiannual Report The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

22 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Changes in Net Assets Franklin Pelagos Commodities Strategy Fund Six Months Ended November 30, 2017 (unaudited) Year Ended May 31, 2017 Increase (decrease) in net assets: Operations: Netinvestmentincome(loss)... $ 125,258 $ (179,958) Netrealizedgain(loss)... 6,302,801 (5,709,788) Netchangeinunrealizedappreciation(depreciation)... (436,243) (785,460) Net increase (decrease) in net assets resulting from operations... 5,991,816 (6,675,206) Capital share transactions: (Note 2) ClassA ,514 1,308,813 ClassC... (20,876) 170,718 ClassR ,801 ClassR6... (2,265,177) (6,433,256) AdvisorClass... (1,327,188) 1,486,143 Total capital share transactions... (3,483,621) (3,451,781) Net increase (decrease) in net assets... 2,508,195 (10,126,987) Net assets: Beginningofperiod ,732, ,859,105 Endofperiod... $129,240,313 $126,732,118 Undistributed net investment income included in net assets: Endofperiod... $ 23,770 $ Accumulated net investment loss included in net assets: Endofperiod... $ $ (101,488) franklintempleton.com The accompanying notes are an integral part of these consolidated financial statements. Semiannual Report 21

23 Notes to Consolidated Financial Statements (unaudited) Franklin Pelagos Commodities Strategy Fund 1. Organization and Significant Accounting Policies Franklin Alternative Strategies Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of four separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Pelagos Commodities Strategy Fund (Fund) is included in this report. The Fund offers five classes of shares: Class A, Class C, Class R, Class R6 and Advisor Class. Each class of shares may differ by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees due to differing arrangements for distribution and transfer agent fees. The following summarizes the Fund s significant accounting policies. a. Financial Instrument Valuation The Fund s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust s Board of Trustees (the Board), the Fund s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value. Debt securities generally trade in the over-the-counter (OTC) market rather than on a securities exchange. The Fund s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Investments in open-end mutual funds are valued at the closing NAV. Derivative financial instruments listed on an exchange are valued at the official closing price of the day. Certain derivative financial instruments are centrally cleared or trade in the OTC market. The Fund s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets. The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity. b. Derivative Financial Instruments The Fund invested in derivative financial instruments in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or 22 Semiannual Report franklintempleton.com