Franklin Templeton Investment Funds Templeton Global Equity Income Fund - A (Mdis) USD

Transcription

1 Templeton Global Equity Group Data as of 31 December 2017 Franklin Templeton Investment Funds - A (Mdis) USD

2 Table of Contents Investment Capabilities Overview...4 Investment Process in Action Secular Pressure...26 Franklin Templeton Investments A Trusted, Long-Term Partner in Investment...5 Management Performance and Characteristics...27 W e Consider Sustainability in All That W e Do...6 Summary...28 Templeton Global Presence...7 W hat are the Key Risks?...29 Templeton Global Equity Group Focus on Core Competencies...8 Sector Allocation...30 Templeton Global Equity Group Value Investors Focused on Seeking Long-Term... 9 Capital Growth for Our Clients Geographic Allocation...31 The Templeton Investment Philosophy Experienced Team of Global Analysts...11 Bottom-Up Stock Pickers: Global Focus Uncovers the Best Opportunities Across...12 Sectors and Geographies Templeton s Valuation-Focused Investment Process...13 Templeton s Valuation-Driven Investment Process...14 ESG Assessments Case Studies...19 Stock Examples...20 Templeton Global Equity Group Upside Potential Through Differentiated Types of...21 Value Investment Process in Action Underappreciated Growth...22 Top Ten Holdings...32 Portfolio Characteristics...33 Discrete Performance Historical Performance...35 Calendar Year Returns Performance Risk Statistics Current Perspectives Sectors Current Perspectives Regions...39 Templeton Global Equity Group Value Investors Focused on Seeking Long-Term Capital Growth for Our Clients Management Profiles Management Profile...42 Investment Process in Action Restructuring Investment Process in Action Macro Crisis Victim...24 Appendix...43 Investment Process in Action Cyclically Depressed...25 Collaboration with Financial Experts Across Franklin Templeton...44 Risk Management Templeton Global Equity Group

3 Table of Contents (continued) An Integrated Global Trading Platform...46 Important Information...47 Glossary...48 Important Disclosures

4 Investment Capabilities Overview FRANKLIN TEMPLETON INVESTMENTS Total Combined Assets Under Management : US$753.8 Billion 2 AUM Equity 5 Fixed Income US$327.7 Billion CAPABILITIES Value Deep Value Core Value Blend GARP Growth Convertibles Sector Shariah Smart Beta INVESTMENT Templeton Global Equity Group (1940) TEAMS Franklin Equity Group (1947) Franklin Mutual Series (1949) Templeton Emerging Markets Group (1987) Franklin LAM-Equity (1993) 8 Multi-Asset Solutions US$289.0 Billion Government Municipals Corporate Credit Bank Loans Securitised Multi-Sector Currencies Sukuk Franklin Templeton Fixed Income Group (1970) Templeton Global Macro (1986) Franklin LAM-Fixed Income (1993) 11 US$130.0 Billion Income Real Return Balanced/Hybrid Total Return Target Date/Risk Absolute Return Tactical Asset Allocation Managed Volatility Franklin Templeton Multi-Asset Solutions (1996) Franklin SystematiQ (2011) Alternatives US$15.3 Billion Commodities Infrastructure Real Estate Hedge Funds Private Equity Franklin Real Asset Advisors (1984) Darby Overseas Investments (1994) K2 Advisors (1994) Pelagos Capital Management (2005) Source: Franklin Templeton Investments (FTI), as of 31 December 2017, based on latest available data. Total combined Assets Under Management (Total AUM) combines U.S. and non-u.s. AUM of the investment management subsidiaries of the parent company, Franklin Resources, Inc. (FRI) [NYSE: BEN], a global investment management organisation operating as FTI. Only selected business entities within FTI claim compliance with the GIPS standards as described in the table of contents if applicable. Total and platform AUM includes discretionary and non-discretionary accounts, including pooled investment vehicles, separate accounts and other vehicles. Total and platform AUM may also include advisory accounts with or without trading authority. In addition, assets for which certain FTI advisers provide limited asset allocation advisory services, and assets that are not allocated to FTI products are not included in the AUM figures shown. Franklin Templeton Multi-Asset Solutions may invest in various investment platforms advised by a number of investment advisory entities within FTI. Platform AUM reported for FT Multi-Asset Solutions therefore may include certain AUM separately reported under each utilised investment platform. Total AUM also includes assets managed by certain FTI advisers that do not form part of the selected investment platforms shown. As a result, the combined platform AUMs may not equal Total AUM and may be calculated and reported separately for regulatory or other purposes under each investment adviser. Each local asset manager may be considered as an entity affiliated with or associated to FTI by virtue of being a direct or indirect wholly-owned subsidiary of FRI, an entity or joint venture in which FRI owns a partial interest, which may be a minority interest, or a third party asset management company to which investment advisory services have been delegated by an FTI adviser. 4

5 5889 Investments Trusted, Long-Term Partner in Investment Franklin Templeton Investments A A Trusted, Long-Term Partner in Investment Management Management Focus on investment excellence Specialised managers offer diverse investment solutions across multiple asset classes Time-tested investment disciplines backed by exceptional research enabling strong long-term performance potential Integrated and comprehensive approach to investment risk management with proven record of success Firm-wide commitment to environmental, social and governance (ESG) investment integration Global perspective shaped by local expertise Pioneer in global investing with a track record of innovation Unmatched breadth and depth of global presence Deep experience and long-term commitment to the markets we enter Strength and experience 70 years of experience with a proven ability to navigate through all market cycles Globally diversified business (by investment objective, geography and client type) Values-driven culture that guides how we work and do business 5

6 5888 We Consider Sustainability in All That We Do At Franklin Templeton, delivering exceptional investment management is our primary business. We act in the best interests of our clients and stockholders. That includes understanding how environmental, social and governance (ESG) factors affect our business and the companies where we invest. As an asset manager, the way we conduct ourselves includes these considerations. It s one of many reasons Franklin Templeton is a trusted partner in asset management. Some of the factors we consider at the corporate level are: ENVIRONMENTAL IMPACT SOCIAL FACTORS GOVERNANCE Energy usage Diversity and inclusion Anti-money laundering Greenhouse gases Talent management (attracting, Code of ethics/conduct Waste/recycling Water consumption retaining top talent) Charitable giving Customer privacy and data security Employee volunteering Compliance Executive compensation Enterprise risk management ESG investment integration 6

7 2988 Templeton Global Presence Templeton Global Presence Buenos Aires Ft. Lauderdale Rio de Janeiro Nassau Toronto London Cape Town Mexico City Warsaw Edinburgh Vienna San Mateo Istanbul Mumbai Bucharest Dubai Bangkok Ho Chi Minh City Shanghai Kuala Lumpur Hong Kong Seoul Melbourne Singapore Frankfurt Templeton Global Equity Research Offices Templeton Emerging Markets Research Offices Templeton has 29 Global Equity and Emerging Markets research offices worldwide, providing on-the-ground, comprehensive research insights and contacts. As of 31 December

8 2878 Templeton Global Equity Group Focus on Core Competencies Templeton s investment approach is highly disciplined and maintains a keen focus on core competencies Since the founding of the firm in the 1940s, we have adhered to our long-term investment philosophy of finding the best bargains We offer strategies where the universe is large enough that we can offer an unconstrained portfolio: Global Equity Non-U.S. Equity Regional Equity Small Cap Equity Balanced Total AUM by Mandate Total AUM by Distribution Channel As of 31 December 2017 As of 31 December 2017 Global1 Retail US$52 billion US$60 billion Non-U.S. Institutional US$36 billion US$42 billion Other2 US$13 billion 1. Global includes global balanced mandates. 2. Other includes regional and single country mandates and global and international small cap. 8

9 2879 Templeton Global Equity Group Value Investors Focused on Seeking Long-Term Long-Term Capital Growth Growth for Our for Clients Capital Our Clients TEMPLETON GLOBAL EQUITY GROUP What Sets Us Apart LONG-TERM PERSPECTIVE DISCIPLINED, REPEATABLE PROCESS adherence to valuation-driven philosophy and process that have navigated every market cycle over seven decades five-year horizon takes advantage of short-term price volatility to reveal long-term investment opportunities RIGOROUS BOTTOM-UP STOCK SELECTION everyone an analyst in a broadly experienced research team, identifying undervalued stocks across global industries FORTITUDE TO BE DIFFERENT conviction to purchase out-of-favour securities and patience to wait for value recognition 9

10 2880 The Templeton Investment Philosophy We Utilise a Disciplined, Consistent Approach Based on Three Timeless Principles of Investing Value Uncover bargains seeking companies trading at large discounts to their business value Business value based on normalised earnings, cash flow or asset value potential Flexible approach in a disciplined framework The best bargains are those stocks having the lowest prices in relation to possible earning power of future years. Sir John Templeton October 1957 Patience Rolling five-year time horizon focused on normalised business value Long-term focus takes advantage of short-term price volatility to reveal investment opportunities Patience allows time for value recognition and has historically resulted in low turnover Bottom-up stock picking Build portfolios with undervalued securities identified through research process Portfolio structure reflects where we are finding value across sectors and regions Portfolio management process seeks to buy pessimism and sell optimism 10

11 2881 Experienced Team of Global Analysts CHIEF INVESTMENT OFFICER Norman Boersma, CFA 31 Years Industry Experience DIRECTOR OF BUSINESS DEVELOPMENT NASSAU, BAHAMAS C. Reed Hutchens, CFA 30 Years Industry Experience FORT LAUDERDALE, UNITED STATES DIRECTOR OF PORTFOLIO MANAGEMENT DIRECTOR OF RESEARCH Antonio T. Docal, CFA 38 Years Industry Experience Heather Arnold, CFA 33 Years Industry Experience FORT LAUDERDALE, UNITED STATES NASSAU, BAHAMAS Europe North America 17 PM/Analysts 5 Analysts 3 PM/Analysts 4 Analysts Asia 5 PM/Analysts 3 Analysts Australia 2 PM/Analysts 39 Portfolio Managers & Research Analysts Average 19 Years of Industry Experience Average 14 Years with Templeton Speak 14 Languages Stable Team / Historically Low Turnover Investment team information is as of 31 December CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. 11

12 2906 Bottom-Up Stock Pickers: Global Focus Uncovers the Best Opportunities Across Global Focus Uncovers the Best Opportunities Across Sectors and Geographies Sectors and Geographies Director of Research: Heather Arnold, CFA GLOBAL SECTOR TEAMS CONSUMERS Tony Docal Herbert Arnett Ferdinand Cheuk Harlan Hodes Peter Moeschter Katherine Owen Joanne Wong Maggie Wong Katie Ylijoki FINANCIALS Media Internet Software/Services Small Cap Media Automobiles Small Cap & Asian Consumer Goods Beverages/Food Products Household/Personal Products Retail Household Durables Textiles & Apparel Auto Components Casinos & Gaming Hotels, Restaurants & Leisure INDUSTRIALS Peter Wilmshurst European Banks MENA Banks Paul de Josselin Australian Banks Asian Banks James Harper Global Insurance Matthew Nagle U.S. Banks Warren Pustam Diversified Financials Latin American Banks Small Cap Financials Maggie Wong Global Real Estate Heather Waddell Suzanne Bateman Martin Cobb Harlan Hodes Clara Lee Tian Qiu Tina Sadler MATERIALS / ENERGY Small Cap Cyclicals Small Cap Capital Goods Machinery Commercial Services & Supplies Trading Company & Distributors Small Cap Cyclicals Machinery Aerospace & Defence Transportation Building & Construction Materials Engineering & Construction Electrical Equipment Industrial Conglomerates Martin Cobb Chris Peel Suzanne Bateman Maarten Bloemen Bhavesh Bombaywala Craig Cameron Peter Morris Tina Sadler Tucker Scott David Tuttle Chemicals Integrated Oil Metals & Mining Alternative Energy Energy E&P Oil Refiners Alternative Energy Asian Energy Energy Equipment & Services Building & Construction Materials Metals & Mining Paper & Forest Products INFORMATION TECHNOLOGY Peter Nori UTILITIES HEALTH CARE Katherine Owen Providers & Services Craig Cameron Generic Manufacturers/ Specialty Pharma Mohan Kandiah Global Pharmaceuticals & Biotechnology Equipment & Supplies Generic Manufacturers/ Specialty Pharma TELECOM SERVICES Peter Moeschter European Utilities North/South American Utilities Craig Cameron Asian Utilities Herbert Arnett Hsung Khoo Matthew Nagle Peter Wilmshurst U.S. Telecom European Telecom Latin American Telecom Global Telecom Equipment Asian, Australian Telecom Ferdinand Cheuk Matthew Nagle Chris Peel Heather Waddell Katie Ylijoki Semiconductor Equipment & Products Asian Technology Electronic Manufacturing Services/Component Manufacturers Software Consumer Electronics/ Office Electronics Technology Hardware & Peripherals IT Services & Consulting ADDITIONAL RESOURCES Research Technology Group Global Research Library Junior Research Analysts Performance Analysis & Investment Risk Group FT-ESG Team Global Trading Platform Product Management Group Templeton Emerging Markets, Templeton Global Macro & Franklin Local Asset Management Groups As of 31 December Note: Sector team leaders in blue boldface. Environmental, Social and Governance (ESG) Coordinator in green boldface. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. 12

13 Templeton s Valuation-Focused Investment Process 13

14 2940 Templeton s Valuation-Driven Investment Process 1 Identify Potential Bargains Experienced analysts Focus on global industry sectors Quantitative and qualitative assessment Identify material ESG issues 2 In-Depth Fundamental Analysis 3 Five-year financial forecasts Presentation of investment thesis Investment parameters Ongoing valuation analysis Management/supplier/ competitive evaluation Investment debate and critique: Devil s Advocate Industry and sector framework Ongoing ESG Monitoring Build and diversify portfolio Disciplined sell methodology Long-term approach: 20% historical turnover1 Weekly peer review and risk analytics Upside/downside return quantification Recommendation of Bargain List candidates Research Team Evaluation ESG Devil s Advocate Director of Research approval 4 Bottom-Up Portfolio Construction 5 Portfolio Monitoring and Risk Management TEMPLETON S BOTTOM-UP STOCK SELECTION PROCESS The above chart is for illustrative and discussion purposes only. 1. Historical turnover is based on Templeton Global Equity Group s overall experience, over a five-year period ended 31 December 2017, and is not intended to reflect the historical turnover of the fund. Please see the fund s fiscal year-end turnover on the Portfolio Summary slide. The turnover is a byproduct of Templeton s long-term approach to managing portfolios, but various factors, such as a portfolio s specific investment parameters and market or economic conditions may cause actual portfolio turnover to vary. For more information regarding an individual strategy s or fund s historical turnover ratio please contact your Franklin Templeton representative. 14

15 2940 A Bottom-Up Research Process Leverages Global Capabilities Across Market Cap Spectrum 1. Identify Potential Bargains Global focus Analysts are aligned by 2. In-Depth Fundamental Analysis Develop research models Revenue drivers; growth sectors globally Unconstrained investable potential Assessment of ESG factors universe Fundamental and quantitative assessment Price/Earnings Price/Book Value Price/Cash Flow on long-term risk/return Operating costs Capital expenditures Capital allocation Retained capital Competitor analysis Identify material ESG issues Environmental Social Governance Five-year financial forecasts Emphasis on future earnings Most attractively valued Upside/downside return companies based on valuation potential Cash flow potential quantification 3. Research Team Evaluation Presentation of investment thesis Valuation history Business outlook relative to global industry Why we believe business is undervalued Opportunities and risks Capital strength appraisal Bargain List Rigorous investment team debate Team vetting generates best thinking Devil s Advocate critique ESG Devil s Advocate Director of Research approval Recommendation of Bargain List candidates The above chart is for illustrative and discussion purposes only. 15

16 2940 Lifecycle of a Templeton Stock VALUATION SOURCE OF FUNDS LIST Fully valued stocks recommended for sale CORE LIST Attractively priced stocks with potential for significant price upside BARGAIN LIST Stocks priced at a significant discount to our estimation of their future business value TIME Templeton s research platform is designed to track securities through their valuation lifecycle. The above chart is intended solely to illustrate the ideal interplay between the Bargain List, Core List and Source of Funds List over an anticipated holding period but there is no guarantee any Templeton stock will follow this lifecycle. The chart is hypothetical and is not intended to represent an actual Templeton portfolio, or any stock purchased or sold by Templeton. 16

17 2940 Bottom-Up Portfolio Construction Step 4 Portfolio Manager Stock Selection Decisions & Oversight Approved Database Sector Analyst Portfolios Source of Funds List Securities on Proprietary Database Core List Analysts highest-conviction holdings per sector Portfolio-Specific Features Mandate parameters Geographic/sector constraints Portfolio cash flow TEMPLETON GLOBAL OR NON-U.S. PORTFOLIO Approximately 100 Securities1 Bargain List SELL Historically low turnover, which may result in lower transaction costs DISCIPLINE The above chart is for illustrative and discussion purposes only. The turnover is a byproduct of Templeton s long-term approach to managing portfolios, but various factors, such as a portfolio s specific investment parameters and market or economic conditions may cause actual portfolio turnover to vary. For more information regarding an individual strategy s or fund s historical turnover ratio please contact your Franklin Templeton representative. Portfolio managers purchase securities from the approved Templeton database of securities which was derived from the investable universe of approximately 10,000 equity securities. 1. Although the typical Templeton Global or Non-U.S. equity portfolio holds approximately 100 securities, individual portfolios may vary, depending on various factors, such as portfolio size or investment strategy. 17

18 2940 Portfolio Monitoring and Risk Management Step 5 TEMPLETON GLOBAL EQUITY GROUP Ongoing Valuation Analysis Disciplined Sell Methodology Research team closely monitors investment thesis including ESG factors and updates forecasts and recommendations: Stocks placed on the Source of Funds List and sold if: Sector Team Meetings Meet monthly to review main holdings, best ideas and sector analyst portfolios, discuss sector drivers and trends, and vet potential new bargains Greater value exists in another similar security, or Price meets/exceeds our estimation of full value, or Fundamental change in our investment thesis occurs Industry Reviews Industry analysis reports and stock holdings formally reviewed twice a year by each analyst to the full investment team Analyst Database Reviews All stocks under analysts coverage also formally reviewed on a rotating weekly schedule Integrated Risk Approach Stock-specific risk is addressed primarily through our research discipline and team vetting process Ongoing assessment of material ESG issues provides another way to quantify potential downside risk Portfolio risk is managed through sector and geographic diversification and weekly peer review process Performance Analysis and Investment Risk (PAIR) Group separately monitors quantitative risk factors, seeking to ensure risks are recognised, rational and rewarded The above chart is for illustrative and discussion purposes only. 18

19 5960 ESG Assessments Case Studies Environmental Social Governance HeidelbergCement KasikornBank Petrofac During our ESG Assessment of HeidelbergCement, KasikornBank, a major bank in Thailand, financed Petrofac is a large engineering and construction a leading building materials company based in Germany, we observed a significant increase in carbon intensity, which presented the risk of increased costs linked to carbon pricing or regulatory caps on emissions. We raised these concerns with management to confirm that the company had policies and programmes in place to manage future emissions. The company provided data showing that their carbon intensity had actually been declining per ton of cement produced over the past several years. Emissions have been stable during a period of rising production, and the company has generated relatively low emissions per sales compared to peers. The company has also instated a new 2030based carbon target, and is working to increase the energy efficiency and the proportion of alternate fuels to 30% by FY2020, which is among the strongest targets in the construction materials industry. the construction of Xayaburi Dam in Laos. A nongovernmental organisation (NGO) claimed it had received substantial opposition to the dam from residents. Protestors voiced concerns the dam would have negative effects on the nearby communities, such as forced displacement, the end to gold panning in the river and difficult access to forest products. We contacted the company regarding these potential ESG concerns. The bank believed it complied with Laos social and environmental laws, based on World Bank standards. KasikornBank had an established ESG Governance System for all credit underwriting, third-party technical advisors to identify areas of non-compliance and direct any necessary corrective actions, and a requirement to submit periodic Environmental Management Reports on projects for monitoring purposes. Multiple ESG concerns would have indicated inadequate risk structures and would have been factored into our determination of the company s valuation. However, this was not the case, as no controversies have been reported since this incident. company focusing on the oil and gas industry in the Middle East. Its stock fell sharply on news of the UK Serious Fraud Office s (SFO) investigation of bribery, corruption and money laundering by Petrofac and its officers, including the CEO and COO. We did not expect the SFO to investigate Petrofac as an earlier investigation by Freshfields and KPMG, which was shared with SFO, indicated that Petrofac s directors were not aware of misconduct and there was no evidence of bribes. The reputational impact of the SFO s investigation will likely have a negative impact on new contracts. This could create financial stress as the company s balance sheet is already stretched. Also, the SFO s investigation highlights corporate governance problems, which could lead to further de-rating, especially if the CEO and COO are charged with bribery. This is not a complete analysis of every material fact regarding an industry, security or investment and should not be viewed as an investment recommendation. It is, however, intended to provide insight into the fund s portfolio selection process. The actions taken with respect to this investment, and its performance, may not be representative of other advice or investments. Factual statements are taken from sources considered reliable, but have not been independently verified for completeness or accuracy by the fund s manager or its affiliates. These opinions may not be relied upon as investment advice or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. In addition, it should not be assumed that any securities transactions discussed were or will prove to be profitable. Logo used for illustrative purposes to identify respective company and should not be construed as an endorsement of or affiliation with Franklin Templeton Investments. 19

20 Stock Examples 20

21 3014 Templeton Global Equity Group Upside Potential Through Differentiated Types of Value Templeton Global Equity Group Upside Potential Through Differentiated Types of Value Templeton s Approach to Bargain Hunting Ensures We Find Many Different Types of Undervalued Stocks Disciplined Value Philosophy Large, Experienced Research Team Longer-Term Perspective Fortitude to be Different In-Depth Fundamental Stock Analysis Flexible Value Approach results in finding many different types of value TYPES OF VALUE Underappreciated Growth Restructuring Macro Crisis Victim Cyclically Depressed Secular Pressure Micro Crisis Patient Time Horizon RESULT Upside Potential Through Differentiated Types of Value 21

22 3208 Investment Investment Process Process in in Action Underappreciated Action Underappreciated Growth Growth Roche Holdings Ltd. International Pharmaceutical and Diagnostics Company Initial Analysis and Thesis Initial Sources of Potential Upside/Risks Financials/Valuation, as of 30 June 2017 Stock De-Rated Due to Uncertainty Initial Scope for Recovery Uncertain outlook for its lead cancer drug, Avastin, a difficult political environment in the US for drug companies and risk of entry of biosimilars weighed on the stock We believed market was underappreciating the sales potential of the already approved cancer products Growing Business with Stable Medium-Term Outlook, in Our View Our Positive View was Driven by Company had an interesting pipeline that could impact a re-rating No material pending patent expirations and biosimilar risks appeared to be overstated Strong Performance, but Further Upside Potential Could be Driven by Long-term pipeline potential not reflected in stock price, in our view Increased recognition of depth of pipeline Attractive Valuation Stock and sector excessively de-rated Valuations didn t seem to reflect the potential ability to continue to expand margins, grow EPS and increase dividends We believe progress from new product launches and successful results from several major clinical trials could likely support the broader use of its key cancer drugs and restore confidence in its growth outlook Successful introduction of new drugs to prolong existing franchises and minimize the impact of biosimilar competition Receding concerns on biosimilar risks Risks Regulatory, pricing and pipeline approval risks This is an example of a stock purchased pursuant to investment advice of the Templeton Global Equity Group (TGEG), but this stock may or may not be currently held by the fund or any portfolio managed by the TGEG. As part of TGEG s investment process, analysts place each investment idea into one of six potential value categories. The security described here represents the largest holding in the Underappreciated Growth category as of 30 June The Initial Analysis and Thesis and Initial Sources of Potential Upside/Risks represent the opinions and analyses of the TGEG solely at the time the security was initially purchased. The Financials/Valuation column represents the opinions and analyses of the TGEG as of 30 June This slide is provided only to illustrate the TGEG s investment process. This is not a complete analysis of every material fact regarding an industry or security. The actions taken with respect to this stock, and its performance, may not represent other advice or investments of the TGEG. It should not be assumed that any securities transactions were or will be profitable. The analysis and opinions of the security discussed herein may change at any time. There is no assurance that any security purchased will remain in the fund s portfolio, or that any security sold will not be repurchased. Factual statements are from sources deemed reliable, but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or recommendations or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. For the fund s top ten holdings, please refer to Top Ten Equity Holdings slide. Holdings are historical and subject to change. Logos are trademarks of their respective owners and are used for illustrative purposes and should not be construed as an endorsement of or affiliation with Franklin Templeton Investments. 22

23 3168 Investment Investment Process Process in in Action Restructuring Action Restructuring ING Group Dutch/Belgian Insurance and Banking Operation Initial Analysis and Thesis Initial Sources of Potential Upside/Risks Financials/Valuation, as of 30 June 2017 Financial Crisis Spurred Restructuring Restructuring Progress Generating Capital Following their financial crisis rescue by the Dutch government, ING was going through drastic restructuring imposed by the European Commission ING had fully disposed of ING Direct the world s largest direct bank ING has already generated significant amounts of capital from asset sales The European Commission had mandated that ING dispose of all of its life insurance businesses, as well What remains is a market leading bank in the Netherlands/Belgium with good growth opportunities in Germany and other markets, where it is positioned as a challenger through its ING Direct brand Restructuring involved exiting many of their international banking markets, as well as their insurance and investment management businesses Remaining Business The remaining business was to be a Dutch-focused bank with significant operations in Belgium and Germany, split half retail and half wholesale Unlocking Value Potential We believed there was further upside potential to the value that could be unlocked through continued disposals of non-core operations Risks Valuation Non-performing loans could have remained elevated due to extended Dutch housing cycle Valuation levels did not reflect the risk/return profile of the remaining business, in our view Basel IV Discounted Valuation ING remains a core holding as the company is posting solid returns, growing its loan book and paying a solid yield with dividends that can grow over time This is an example of a stock purchased pursuant to investment advice of the Templeton Global Equity Group (TGEG), but this stock may or may not be currently held by the fund or any portfolio managed by the TGEG. As part of TGEG s investment process, analysts place each investment idea into one of six potential value categories. The security described here represents the largest holding in the Restructuring category as of 30 June The Initial Analysis and Thesis and Initial Sources of Potential Upside/Risks represent the opinions and analyses of the TGEG solely at the time the security was initially purchased. The Financials/Valuation column represents the opinions and analyses of the TGEG as of 30 June This slide is provided only to illustrate the TGEG s investment process. This is not a complete analysis of every material fact regarding an industry or security. The actions taken with respect to this stock, and its performance, may not represent other advice or investments of the TGEG. It should not be assumed that any securities transactions were or will be profitable. The analysis and opinions of the security discussed herein may change at any time. There is no assurance that any security purchased will remain in the fund s portfolio, or that any security sold will not be repurchased. Factual statements are from sources deemed reliable, but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or recommendations or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. For the fund s top ten holdings, please refer to Top Ten Equity Holdings slide. Holdings are historical and subject to change. Logos are trademarks of their respective owners and are used for illustrative purposes and should not be construed as an endorsement of or affiliation with Franklin Templeton Investments. 23

24 3173 Investment Investment Process Process in in Action Macro Action Macro Crisis Crisis Victim Victim BNP Paribas European Commercial and Investment Bank Initial Analysis and Thesis Initial Sources of Potential Upside/Risks Financials/Valuation, as of 30 June 2017 Well-Positioned to Weather European Sovereign Debt Crisis, in Our View Scope for Potential Recovery Could be Driven by Valuation A normalisation of economic conditions in key markets Low exposure to structured credit and over-leveraged economies A lower cost to income ratio over time on their acquisition BNP is highly diversified with significant spread of geographic and operating business lines It appeared to be one of the most attractively valued European banks in 2009 maintaining double digit Return on Total Equity (RoTE) Re-rating as it deserves to trade at a premium to tangible book value, in our view Strong Retail and Wealth Management Franchises Continued to deliver volume growth in 4 of its 5 main retail networks Wealth management business continued to produce strong returns on capital Risks Sovereign risks (Europe generally and France specifically) had a material impact Capital is now sufficient and dividends are increasing, yet the market is undervaluing the franchise and underappreciating BNP s diversity We continue to see long-term value in BNP as the bank is a well-managed, diversified business that is expected to generate double digit return-on-tangible equity over the long term Changing European bank regulations created uncertainty Litigation and overall regulatory risk Attractive Valuation Depressed valuation didn t give credit for BNP s attractive risk/return profile vs. European peers, in our view This is an example of a stock purchased pursuant to investment advice of the Templeton Global Equity Group (TGEG), but this stock may or may not be currently held by the fund or any portfolio managed by the TGEG. As part of TGEG s investment process, analysts place each investment idea into one of six potential value categories. The security described here represents the largest holding in the Macro Crisis Victim category as of 30 June The Initial Analysis and Thesis and Initial Sources of Potential Upside/Risks represent the opinions and analyses of the TGEG solely at the time the security was initially purchased. The Financials/Valuation column represents the opinions and analyses of the TGEG as of 30 June This slide is provided only to illustrate the TGEG s investment process. This is not a complete analysis of every material fact regarding an industry or security. The actions taken with respect to this stock, and its performance, may not represent other advice or investments of the TGEG. It should not be assumed that any securities transactions were or will be profitable. The analysis and opinions of the security discussed herein may change at any time. There is no assurance that any security purchased will remain in the fund s portfolio, or that any security sold will not be repurchased. Factual statements are from sources deemed reliable, but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or recommendations or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. For the fund s top ten holdings, please refer to Top Ten Equity Holdings slide. Holdings are historical and subject to change. Logos are trademarks of their respective owners and are used for illustrative purposes and should not be construed as an endorsement of or affiliation with Franklin Templeton Investments. 24

25 4745 Investment Investment Process Process in in Action Cyclically Action Cyclically Depressed Depressed BP PLC International Oil and Gas Company Initial Analysis and Thesis Initial Sources of Potential Upside/Risks Financials/Valuation, as of 30 June 2017 Bargain Value Catalyst BP sold off due to the decline in oil prices at the back end of 2014 Scope for Potential Recovery Could be Driven by Remains Undervalued, According to Our Analysis We believed re-rating would come as free cash flow improved on the back of rising oil prices, increasing production and cost cutting We believe returns for BP should improve as costs fall and oil prices rise toward the price that encourages investment. BP should generate material FCF in outer years and limit capital investment even if oil prices rise a change from the past. Attractive Valuation We believed that the final resolution of the Macondo accident would be manageable for the company given its strong balance sheet and sufficient cash flow, this appeared to be already priced into the stock We believed that BP s shares would recover as costs fell, production grew and oil prices rose toward a price that encouraged investment, increasing overall returns from depressed levels The dividend yield was 8%, and we believe it is sustainable with oil prices between $55-60 BP has a large number of projects coming online over our investment horizon that will drive production growth We believe the dividend yield should compress as it becomes clear it is sustainable even in a $50-$60 world The dividend should be sustainable with oil prices at $50-60 a barrel Risks Oil price sensitivity Dividend cut if oil prices remain depressed This is an example of a stock purchased pursuant to investment advice of the Templeton Global Equity Group (TGEG), but this stock may or may not be currently held by the fund or any portfolio managed by the TGEG. As part of TGEG s investment process, analysts place each investment idea into one of six potential value categories. The security described here represents the largest holding in the Cyclically Depressed category as of 30 June The Initial Analysis and Thesis and Initial Sources of Potential Upside/Risks represent the opinions and analyses of the TGEG solely at the time the security was initially purchased. The Financials/Valuation column represents the opinions and analyses of the TGEG as of 30 June This slide is provided only to illustrate the TGEG s investment process. This is not a complete analysis of every material fact regarding an industry or security. The actions taken with respect to this stock, and its performance, may not represent other advice or investments of the TGEG. It should not be assumed that any securities transactions were or will be profitable. The analysis and opinions of the security discussed herein may change at any time. There is no assurance that any security purchased will remain in the fund s portfolio, or that any security sold will not be repurchased. Factual statements are from sources deemed reliable, but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or recommendations or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. For the fund s top ten holdings, please refer to Top Ten Equity Holdings slide. Holdings are historical and subject to change. Logos are trademarks of their respective owners and are used for illustrative purposes and should not be construed as an endorsement of or affiliation with Franklin Templeton Investments. 25

26 5420 Investment Investment Process Process in in Action Secular Action Secular Pressure Pressure Vodafone PLC World Leader in Mobile Communications Initial Analysis and Thesis Initial Sources of Potential Upside/Risks Financials/Valuation, as of 30 June 2017 Concerns in European Telecom Sector Sent Shares into Bargain Territory Multi-year cash flow growth ahead Remains Undervalued, According to Our Analysis FCF is returning to growth in key European markets and this should support modest dividend growth Vodafone is offering an attractive dividend yield which is towards the higher end of its long-term trading history. Dividends are secure despite the challenges at the Indian business, in our view Industry wide declines in wireline subscriptions create structural pressure Proposed regulatory change leading to consolidation expected to be challenged Global Leader in Mobile Communications One of the top brands globally with over 400mln customers across 30 countries and 5 continents; 60% of cusomers in emerging markets Attractive Valuation Trading at a material discount to our sum of the parts analysis Competitive position has improved post an accelerated capex program and transformative deals and regulatory headwinds have also stabilised An eventual consolidation of the Indian mobile industry would remove the cash burn overhang on Vodafone s valuation M&A Optionality The market continues to underappreciate growth from Vodafone's European fixed-broadband business and cost saving initiatives Reduced cash drag at Vodafone India and a materially accretive deal with Liberty Global provide scope for further upside There is strong industrial logic for a deal with Liberty Global which offers compelling revenue and cost synergies Risks Foreign exchange movements Competition in the UK and Italy worse than expected Capex higher than expected This is an example of a stock purchased pursuant to investment advice of the Templeton Global Equity Group (TGEG), but this stock may or may not be currently held by the fund or any portfolio managed by the TGEG. As part of TGEG s investment process, analysts place each investment idea into one of six potential value categories. The security described here represents the largest holding in the Secular Pressure category as of 30 June The Initial Analysis and Thesis and Initial Sources of Potential Upside/Risks represent the opinions and analyses of the TGEG solely at the time the security was initially purchased. The Financials/Valuation column represents the opinions and analyses of the TGEG as of 30 June This slide is provided only to illustrate the TGEG s investment process. This is not a complete analysis of every material fact regarding an industry or security. The actions taken with respect to this stock, and its performance, may not represent other advice or investments of the TGEG. It should not be assumed that any securities transactions were or will be profitable. The analysis and opinions of the security discussed herein may change at any time. There is no assurance that any security purchased will remain in the fund s portfolio, or that any security sold will not be repurchased. Factual statements are from sources deemed reliable, but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or recommendations or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. For the fund s top ten holdings, please refer to Top Ten Equity Holdings slide. Holdings are historical and subject to change. For investor use only. forused distribution retail investors. 26 Logosprofessional are trademarks of their respective ownersnot and are for illustrativetopurposes and should not be construed as an endorsement of or affiliation with Franklin Templeton Investments.

27 Performance and Characteristics 27

28 Summary - A (Mdis) USD As of 31 December 2017 Summary of Investment Objective The Fund aims to provide a combination of current income and long-term capital appreciation by investing, under normal market conditions, in a diversified portfolio of equity securities worldwide. Morningstar Category Global Equity Income Investment Style Value Fund Inception Date 27 May 2005 Share Class Inception Date 27 May 2005 Portfolio Manager(s) Benchmark MSCI All Country World Index Peter Wilmshurst, CFA Base Currency for Fund USD Base Currency for Share Class USD Total Net Assets (USD) 163,829, Portfolio Turnover 38.42% Asset Allocation Equity: 95.04% Australia Fund Identifiers ISIN Code LU SEDOL Code B0BTCB0 Bloomberg Code TGEIADI LX Cash & Cash Equivalents: 4.96% Fund Ratings (31 December 2017) Number of Issuers 66 Overall Morningstar Rating Total Expense Ratio 1.60% Distribution Yield 3.83% ««The Portfolio Turnover is calculated over a 12-month period as at the end of the fiscal year (30 June 2017). Holdings of the same issuer have been combined. Morningstar, Inc All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) 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. Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. Past performance is not an indicator or a guarantee of future performance. 28

29 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 around the world. 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. The Fund may distribute income gross of expenses. W hilst this might allow more income to be distributed, it may also have the effect of reducing capital. Other significant risks include: currency risk, emerging markets risk, liquidity risk, derivatives 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. 29

30 Sector Allocation vs. MSCI All Country World Index As of 31 December 2017 Financials Energy Health Care Telecommunication Services Consumer Discretionary Information Technology Industrials Materials Utilities Consumer Staples Real Estate Cash & Cash Equivalents 0% 8% 16% 24% 32% MSCI All Country World Index 40% Financials Banks Diversified Financials Insurance Energy Health Care Pharmaceuticals, Biotechnology & Life Sciences Health Care Equipment & Services Telecommunication Services Consumer Discretionary Media Automobiles & Components Retailing Consumer Durables & Apparel Consumer Services Information Technology Software & Services Technology Hardware & Equipment Semiconductors & Semiconductor Equipment Industrials Capital Goods Transportation Commercial & Professional Services Materials Utilities Consumer Staples Food, Beverage & Tobacco Household & Personal Products Food & Staples Retailing Real Estate Cash & Cash Equivalents Portfolio % Index % Over/Under % Weightings as percent of total. Percentage may not total 100% due to rounding. Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change. 30

31 Geographic Allocation vs. MSCI All Country World Index As of 31 December 2017 Europe North America Asia Australia / New Zealand Mid-East / Africa Latin America / Caribbean Cash & Cash Equivalents 0% 12% 24% 36% 48% MSCI All Country World Index 60% Europe United Kingdom France Switzerland Netherlands Italy Germany Ireland Others North America United States Canada Asia Japan Thailand Singapore China Taiwan South Korea Others Australia / New Zealand New Zealand Australia Mid-East / Africa Israel Others Latin America / Caribbean Others Cash & Cash Equivalents Emerging Markets Exposure Portfolio % Index % Over/Under % Emerging markets exposure is based on the countries included in the MSCI Emerging Markets Index. Weightings as percent of total. Percentage may not total 100% due to rounding. Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change. 31

32 Top Ten Holdings As of 31 December 2017 Name of Issuer Country Industry JPMORGAN CHASE & CO United States Banks 2.94 ROCHE HOLDING AG Switzerland Pharmaceuticals, Biotechnology & Life Sciences 2.72 MICROSOFT CORP United States Software & Services 2.72 HSBC HOLDINGS PLC United Kingdom Banks 2.71 TOTAL SA France Energy 2.57 VODAFONE GROUP PLC United Kingdom Telecommunication Services 2.50 BNP PARIBAS SA France Banks 2.38 BP PLC United Kingdom Energy 2.34 ROYAL DUTCH SHELL PLC United Kingdom Energy 2.23 ENI SPA Italy Energy 2.17 Total % of Total The Ten Largest Holdings represent the ten largest holdings of the fund as of the date indicated. These securities do not represent all of the securities purchased, sold or recommended for advisory clients, and the reader should not assume that investment in the securities listed was or will be profitable. All portfolio holdings are subject to change. Holdings of the same issuer have been combined. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise be included in the top 10 holdings list. 32

33 Portfolio Characteristics vs. MSCI All Country World Index As of 31 December 2017 Price to Earnings (12-mo Trailing) Price to Cash Flow Price to Book Dividend Yield Market Capitalisation (Millions USD) Market Capitalisation Breakdown in USD <2.0 Billion Billion Billion Billion Billion >50.0 Billion N/A Portfolio Index 15.59x 6.32x 1.36x 3.70% 108, x 12.18x 2.34x 2.28% 112,116 Portfolio % Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change. 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 dividend yield quoted here is the yield on securities within the Fund s portfolio and should not be used as an indication of the income received from this portfolio. The market capitalisation figures for both the portfolio and the benchmark are the security level, not aggregated up to the main issuer. Source: FactSet. Price Ratio calculations for the weighted average use harmonic means. Any exceptions to this are noted. Market capitalisation statistics are indicated in the base currency for the portfolio presented. Past performance is not an indicator or a guarantee of future performance. 33

34 Discrete Performance - A (Mdis) USD As of 31 December 2017 Discrete Annual Performance (%) - A (Mdis) USD Net of Fees MSCI All Country World Index Inception Date 12/16 12/17 12/15 12/16 12/14 12/15 12/13 12/14 12/12 12/ All performance data shown is in the Fund currency stated and net of management fees. Sales charges and other commissions, taxes and other relevant costs paid by the investor are not included in the calculations. Performance data may represent blended share class performance, e.g., hybrid created from an A (dis) share class which was converted to A (acc). The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. 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. Current performance may differ from figures shown. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, performance may also be affected by currency fluctuations. Please visit franklintempleton.lu for current performance. 34

35 Historical Performance - A (Mdis) USD As of 31 December 2017 Annualised Total Returns (%) - A (Mdis) USD Net of Fees Inception Date 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Incept Inception Date 1 Mth 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Incept MSCI All Country World Index Cumulative Performance (%) - A (Mdis) USD Net of Fees MSCI All Country World Index All performance data shown is in the Fund currency stated and net of management fees. Sales charges and other commissions, taxes and other relevant costs paid by the investor are not included in the calculations. Performance data may represent blended share class performance, e.g., hybrid created from an A (dis) share class which was converted to A (acc). The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. 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. Current performance may differ from figures shown. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, performance may also be affected by currency fluctuations. Please visit franklintempleton.lu for current performance. 35

36 Calendar Year Returns - A (Mdis) USD As of 31 December % % % -26% -47% A (Mdis) USD Net of Fees MSCI All Country World Index All performance data shown is in the Fund currency stated and net of management fees. Sales charges and other commissions, taxes and other relevant costs paid by the investor are not included in the calculations. Performance data may represent blended share class performance, e.g., hybrid created from an A (dis) share class which was converted to A (acc). The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. 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. Current performance may differ from figures shown. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, performance may also be affected by currency fluctuations. Please visit franklintempleton.lu for current performance. 36

37 Performance Risk Statistics - A (Mdis) USD As of 31 December 2017 Performance Risk Statistics 1 Yr 3 Yrs* 5 Yrs* 10 Yrs* - A (Mdis) USD MSCI All Country World Index Beta^^ Sharpe Ratio Standard Deviation (%): Tracking Error (%)^^ Information Ratio^^ The base currency of a fund determines the risk-free rate index used in calculating certain risk statistics on this page. A fund that is based in USD uses the US T-Bill Index as the risk free rate return, a EUR-based fund uses the Euro 3-Month T-Bill Index, a GBP-based fund uses the UK Treasury Bills 3 Month Index, a JPY-based fund uses the Japan Financing Bill 3 Month Index, and an AUD-based fund uses the Australia T-Note 3 Month Index. ^^Measured against the MSCI All Country World Index. *Annualised. Past performance is not an indicator or a guarantee of future performance. 37

38 2884 Current Current Perspectives Sectors Perspectives Sectors As of 31 December 2017 Sector Opportunities Comments MANY The European banking sector continues to make progress. Earnings revisions have returned to a positive trajectory, regulatory capital has been largely rebuilt and the bulk of post-crisis re-regulation efforts are now complete. As economic data have improved and political risks receded, credit demand has increased. With the bulk of recovery behind it, we believe sector performance will now be more dependent on factors outside management s control, like the trajectory of interest rates and credit demand. Value opportunities in European banks have become more selective. In Asia, prospects for improving corporate governance and political stability have combined with rising interest rates and genuine economic growth to benefit the regional banking sector. In the US, we have pared some holdings as expectations for rising rates have largely been incorporated into valuations; some opportunities are still evident in consumer finance. MANY Concerns about generic competition, regulatory scrutiny, and a consolidating payor sector all pressured health care stocks in We believe pricing pressures and generic competition are best addressed via innovation, and innovation is fueled by research and development, which has doubled in the past 30 years. Despite the political controversy surrounding drug pricing, prescription drug costs account for merely 11% of US and 14% of EU health care spend. The sector has only been cheaper on free cash flow multiples 15% of the time, and we are finding the best values among innovative firms capable of commanding pricing power and consistently generating cash flow by successfully addressing unmet medical needs. It s rare to find highly cash-generative, innovative businesses with enormous growth potential trading in deep value territory, but we believe select biotech and pharma firms offer such a proposition. MANY We expect oil could trade in the US$50 US$70 range in the near term barring any exogenous shocks like a Venezuela supply disruption, abrupt move in the US dollar, or unexpected OPEC strategy change or quota non-adherence. Sustained pricing at this level would likely offer additional upside to our holdings, some of which still reflect sub-us$50 oil. However, given the elasticity of supply from the industry s marginal producer US shale we expect sustained high oil prices will lead to increased output, potentially capping price appreciation. Overall, we look to selectively reduce exposure at this point in the cycle. Information Technology SOME In software, we believe continued migration to cloud computing will allow select firms to capture revenue and profit from other parts of the technology sector. Hardware is more challenging as smartphones and tablets continue to take market share from traditional products. Margins may improve as costs are cut, but top-line growth will likely remain elusive. Semiconductors are benefiting from a surge in memory demand, though earnings and valuations look to be near cyclical peaks, limiting value opportunities. With every major tier in the tech stack disrupted by new technologies, our approach is to identify both mature companies with the ability to adapt to change as well as new entrants likely to emerge as winners. While we have some exposure to the dominant internet and consumer tech firms that have performed so well recently, we have avoided a number of these stocks on valuation grounds. Industrials SOME We are finding select opportunities in the sector, particularly among companies benefiting from restructuring or exposure to end markets with better growth prospects, such as aerospace/defence and industrial automation. We have avoided expensive companies that fail to reflect the maturity of their business cycles or that reflect excessive optimism with regard to sustainable growth rates and returns. Consumer Discretionary SOME Fuller valuations in the sector have recently led us to sell some holdings and redirect proceeds toward areas that we believe offer more attractive longer-term value. Opportunities remain in some select retail franchises that can grow in a challenging environment or restructure their operations. Telecom Services SOME Valuations in the European telecoms industry reached multi-decade lows over the course of 2017, creating select opportunities to add to high-yielding stocks featuring potential catalysts as the industry consolidates, the regulatory backdrop improves and cash flows begin to recover. Select opportunities also exist among Asian telecoms with undervalued growth prospects, data exposure and/or stakes in attractive affiliated businesses. Materials SOME Construction materials firms have begun to reflect expected earnings improvements. Some chemicals stocks offer idiosyncratic opportunities to own high-quality businesses. In mining, the cycle offered up a few bargains among industrial metals producers, though last year s reflationary rally prompted our rotation into some select precious metals firms featuring cheap valuations, strong balance sheets, attractive growth profiles and defensive characteristics. Financials Health Care Energy Consumer Staples FEW We find scarce long-term value in a competitive, low-margin industry where valuations have been bid up by investors crowding into the safety trade. Utilities FEW In our view, utilities are broadly expensive considering the potential impacts of weaker economic growth and increasing regulatory interference on power demand and industry pricing. Oversupply concerns persist in developed markets. FEW Few opportunities in this late-cycle sector as bond yields rise, given already-expensive valuations and compressed cap rates. Real Estate All statements are opinions only and are expressed as of the publication date and are subject to change without prior notice. This is not a complete analysis of any industry, sector or region and should not be construed as an investment recommendation or advice. 38

39 2908 Current Current Perspectives Regions Perspectives Regions As of 31 December 2017 Region Europe United States Emerging Markets Opportunities Comments MANY Economic growth on the continent continues to positively surprise, with Europe s manufacturing purchasing managers index (PMI) ending 2017 at the highest level on record. The backdrop of easier fiscal policy, still-accommodative monetary policy, a falling savings ratio and accelerating investment on the back of high capacity utilisation looks particularly auspicious. Despite recent messaging from the European Central Bank regarding its intentions to scale back bond purchases, any quantitative tightening is likely to be gradual, and the bank s single mandate of price stability suggests it is likely to remain relatively dovish. Political risks remain, but have receded and look increasingly less likely to destabilise the region s gathering cyclical economic and market upturn. Going forward, we believe European equities stand to benefit from both earnings growth and multiple expansion. While 2017 was the best year for eurozone earnings since 2010, margins are below average and PMI surveys are consistent with further margin expansion. At year-end, continental Europe traded at a ~40% discount to the US on normalised earnings, more than double the normal discount. The equity risk premium in Europe was also elevated at over 8%, offering attractive prospective returns, while the average dividend yield of European equities exceeded the European junk bond yield for the first time on record. SOME Tax reform could boost near-term earnings, but comes with risks, including wider deficits and political backlash absent clear middle-class gains. The anemic economic recovery is now gathering pace, extending one of the longest expansions on record. US Federal Reserve tightening may test stocks and the economy, and policy reversal from central banks abroad could impact bond yields by curbing Treasury appetite. Unlike Europe, where the risk premium has been high for some time and has room to recede, risk appears under-discounted in the US, where valuations may inadequately reflect rising political uncertainty, tightening monetary policy and a more mature profit cycle. SOME Emerging markets are not homogenous; conditions between markets can vary dramatically. On a headline basis, many emerging markets look attractively valued to us relative to developed-market peers. However, such discounts have historically existed and are largely justified given higher political risk, weaker rule of law, less financial transparency and concerns about corporate governance and shareholder rights. Also impacting relative valuations is the preponderance of emerging-market companies in the resource and financial sectors, which tend to carry lower valuations for good reasons, including leveraged exposure to commodity markets and cyclical fluctuations. Though our exposure has risen recently, it is concentrated in north Asia, and we remain underweight. Asia ex-japan SOME Japan SOME Australia FEW South Korea and China were the top performing Asian bourses in 2017, and we maintained meaningful exposure to both markets. South Korea s recovery has been fundamentally driven, with corporate earnings rising and the won appreciating on the back of strong export growth. Yet, the market now trades at a lower price-to-earnings ratio than it did at the beginning of China also trades at modest valuations despite strong performance. Macro risks persist, and Chinese officials will continue efforts to tame financial excess and transition to a more sustainable economic model by deleveraging, de-risking and closing excess capacity. The market offers a compelling combination of high organic growth and cheap valuations, though we have largely avoided highly valued sectors and state-controlled sectors plagued by excessive leverage and capacity. We focus on lowly valued H-share stocks in the consumer- and serviceoriented sectors likely to capture an increasing share of China s future economic growth. Japan is one of the few markets in the world that is both under-owned and trading at a discount to its historical valuation levels. Investor caution likely relates to legacy issues of low growth, expensive valuations, excessive leverage and poor returns. Yet, conditions have improved. Japan s gross domestic product is growing at an above-trend pace, corporate governance is improving and earnings have recently risen to multi-decade highs while leverage fell to multi-decade lows. As fundamentals have improved, valuations have become more attractive, with Japanese equities now trading on par with developed world peers for the first time in 20 years. Structural headwinds attributable to aging demographics and high government debt persist, but we believe Japan is heading in the right direction, and we continue to find selective bottom-up bargains in the market. Limited value opportunities. All statements are opinions only and are expressed as of the publication date and are subject to change without prior notice. This is not a complete analysis of any industry, sector or region and should not be construed as an investment recommendation or advice. 39

40 2879 Templeton Global Equity Group Value Investors Focused on Seeking Long-Term Long-Term Capital Growth Growth for Our for Clients Capital Our Clients TEMPLETON GLOBAL EQUITY GROUP What Sets Us Apart LONG-TERM PERSPECTIVE DISCIPLINED, REPEATABLE PROCESS adherence to valuation-driven philosophy and process that have navigated every market cycle over seven decades five-year horizon takes advantage of short-term price volatility to reveal long-term investment opportunities RIGOROUS BOTTOM-UP STOCK SELECTION everyone an analyst in a broadly experienced research team, identifying undervalued stocks across global industries FORTITUDE TO BE DIFFERENT conviction to purchase out-of-favour securities and patience to wait for value recognition 40

41 Management Profiles 41

42 Management Profile PETER WILMSHURST, CFA Executive Vice President Portfolio Manager, Research Analyst Templeton Global Equity Group Franklin Templeton Investments Australia Limited Melbourne, Victoria, Australia Peter Wilmshurst is an executive vice president in the Templeton Global Equity Group with research responsibility for banks in Europe, and Asian telecommunications companies. He is also the coordinator for the financials sector team and the portfolio manager of a number of Templeton's global portfolios. Prior to joining Franklin Templeton in 1998, Mr. Wilmshurst was an equity portfolio manager and analyst with Norwich Investment Management in Australia and an actuary at MLC Life Company. He entered the financial services industry in Mr. Wilmshurst holds a bachelor of economics degree and a master of economics degree from Macquarie University (Australia). He qualified as a Fellow of the Institute of the Actuaries of Australia and as a Fellow of the Financial Services Institute of Australia. Mr. Wilmshurst is a Chartered Financial Analyst (CFA) charterholder and a past president of the CFA Society of Melbourne. 42