Templeton Growth Fund, Inc. Advisor Class

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1 Templeton Growth Fund, Inc. Advisor Class Value Equity Product Profile Product Details 1 Fund Assets $14,156,143, Fund Inception Date 11/29/1954 Number of Issuers 91 NASDAQ Symbol TGADX Maximum Sales Charge 0.00 Investment Style Benchmark Lipper Classification Morningstar Category Dividend Frequency Asset Allocation 2 EQUITY CASH & CASH EQUIVALENTS FIXED INCOME Value MSCI All Country World Index Global Multi-Cap Value World Large Stock Annually in December % 50% 100% 150% Fund Description The fund seeks long-term capital growth by investing predominantly in the equity securities of companies located anywhere in the world, including developing markets. Performance Data 3,4 Average Annual Total Returns 5 (%) Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs (11/29/1954) Advisor Class MSCI All Country World Index 30% 20% 10% 0% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception Advisor Class Total Annual Operating Expenses With Waiver:0.8% Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. Advisor Class shares are offered only to certain eligible investors as stated in the prospectus. They are offered without sales charges or Rule 12b-1 fees. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. Calendar Year Returns (%) Advisor Class MSCI All Country World Index Portfolio Manager Insight 6 Market Review Global equity markets advanced in US-dollar terms during the fourth quarter of Investors mainly focused on continued indications of positive economic growth from several regions and expectations surrounding tax reform in the United States. The International Monetary Fund in October upgraded its forecast for global growth in 2017 and However, it cautioned that recovery from the global financial crisis remains incomplete, and that latent risks could return as central banks pivot away from extensive stimulus. Emerging stock markets, as measured by MSCI indexes, collectively topped their developed-market peers during the fourth quarter. 1. All holdings are subject to change. Holdings of the same issuers have been combined. 2. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to rounding. All holdings are subject to change. 4. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 5. Periods shorter than one year are shown as cumulative total returns. Not FDIC Insured May Lose Value No Bank Guarantee

2 In emerging markets, China s third-quarter annual gross domestic product (GDP) growth was in line with consensus expectations. The World Bank lifted its forecast for China s 2017 GDP, while expecting somewhat decelerated growth in 2018 and 2019 due to domestic policy tightening. South Korea s third-quarter GDP grew year-on-year, and the country s central bank raised interest rates for the first time in six years during November. Brazil s thirdquarter GDP also rose year-on-year, and the country s central bank cut its benchmark interest rate in October and December, bringing it to an all-time low. Mexico s third-quarter annualized GDP growth was the weakest since In the United States, a major tax bill was signed into law in December that featured a significant reduction in the corporate tax rate. The US Federal Reserve (Fed) raised short-term interest rates during the same month, the latest in a series of well-flagged moves. The Fed also maintained its forecast of three rate increases in Meanwhile, third-quarter US GDP came in ahead of consensus estimates. In other developed markets, the European Central Bank raised its forecast for eurozone GDP growth in 2017 and through 2020, though it expects growth to moderate after In early November, the Bank of England hiked its benchmark interest rate for the first time in 10 years. Japan s second preliminary third-quarter GDP reading indicated a stronger-than-expected pace of growth compared to the previous quarter and on an annualized basis. Performance Review The fund underperformed its benchmark for the quarter. Markets maintained a risk-on bias during the three-month review period, with cyclical sectors like energy, information technology (IT) and consumer discretionary leading returns while traditionally defensive sectors like utilities, telecommunication services and health care fared poorly. The fund was reasonably well positioned to take advantage of some sector trends during the quarter under review, though stock selection notably detracted. As we discuss in the outlook section of this report, we believe the quantitative easing programs of major central banks that have manipulated asset prices and frustrated the efforts of bottom-up stockpickers and which we regard as financial repression are unsustainable. The process of reversing these policies is already underway. It is unlikely to be an easy reversal, though ultimately the impending transition of this mature cycle should support the beleaguered value stocks that have lagged over the course of this historically anomalous period of experimental policy. Sector Analysis Turning to the fund s performance, health care was the most significant sector detractor during the quarter, pressured both by stock selection and an overweight in the weak, defensive sector. US health care firms Allergan, Gilead Sciences and Amgen impaired relative results. Shares of pharmaceutical firm Allergan declined on concerns about competition from generics. Despite the market s excessive focus on product-specific headwinds, we estimate Allergan as a whole has one of the industry s most durable drug portfolios when it comes to exclusivity and patent protection. The company also boasts an industry-leading research and development (R&D) pipeline that, in conjunction with its base businesses, should continue to drive strong earnings and free cash flow growth over our investment horizon. More generally, continued concerns about generic competition, increasing regulatory and political scrutiny on pricing, and a consolidating payer industry all broadly pressured the health care sector throughout We view such concerns as both myopic and overstated. Generic competition is a fact of life in the pharmaceutical industry, and one best addressed through innovation, which has accelerated following the doubling of R&D investment over the last 30 years. In our analysis, the regulatory and political concerns about pricing ignore data indicating prescription drugs represent a relatively modest portion of US health care costs and actually lower costs elsewhere in the health care system. Moreover, the structure of the pharmacy benefits management industry has long been oligopolistic, and drug companies are accustomed to dealing with it; thus we think a bit more merger and acquisition activity in the industry would be unlikely to meaningfully change bargaining power dynamics. The overblown concerns have depressed valuations such that the sector today has rarely been cheaper historically on free cash flow multiples, according to our analysis. It is rare to find highly cash-generative, innovative businesses with enormous growth potential trading in deep value territory, but we see select biotechnology and specialty pharmaceutical firms offering just such potential opportunities. Stock selection in the industrials sector also pressured the fund s relative performance in the fourth quarter. UK defense contractor BAE Systems was the biggest detractor from the sector, declining on concerns about potential weakness in UK defense spending amid Brexit uncertainty and recovering Labour Party momentum. While such concerns look fully discounted in BAE s quarter-end share price, we actually see limited impact from these factors on the company, which sources a substantial amount of revenue outside its home country. Additionally, the United Kingdom has reiterated its commitment to defense spending of 2% of GDP, and BAE s business with the British government involves multi-year programs that are fully contracted and funded; delays likely would only make such contracts more expensive for the United Kingdom in the long term. In the overseas segment where the company makes most of its sales, BAE continues to report solid progress amid a gradually strengthening global defense spending environment. Most notably, Qatar signaled its intent to buy 24 Eurofighter Typhoon jets earlier in the fall, and BAE s stock should benefit once this order materializes. Continued progress addressing the firm s pension deficit could also support the shares in the intermediate term. Stock selection in the IT sector also detracted from the fund s relative results. Shares of Chinese search giant Baidu came off of record highs after the firm forecasted lower-than-expected revenue amid rising competition at its core search business and ancillary growth franchises like video, food delivery and driverless cars. Baidu s core search business appears to be under-earning its potential, and the company has traded at a significant discount to industry peers. However, it is addressing its margin pressures by divesting or restructuring loss-making operations, as well as pursuing structurally attractive long-term growth opportunities largely ignored by the market. Elsewhere in the sector, US-based enterprise software provider Oracle hampered relative results. Turning to contributors, stock selection in the financials sector had a positive impact, led by led by South Korean lender KB Financial Group. Its shares rallied on a healthy macroeconomic backdrop and improving earnings prospects following the first South Korean interest-rate hike in six years. Similar to South Korea, Europe also has been benefiting from a stronger economic upcycle and the prospect of incrementally tighter monetary policy, and we remain constructive on our select banking, asset management, and insurance holdings in Europe. Shares of US financial services firm Capital One Financial also gained in value after the firm demonstrated the ability to stabilize charge-offs and stem losses through tighter underwriting and slower loan growth. Investors cheered the firm s forecast of healthy profit improvement in 2017 amid cost cuts and market share gains in the auto loan business. Improving capital ratios, a solid funding profile and expanding net interest margins were also well received and keep us positive on the stock as strategic execution continues apace. The fund s energy allocation outperformed relative to the benchmark thanks to stock selection and a significant overweighting. US oil services firm Helmerich & Payne and UK integrated oil major Royal Dutch Shell finished among the fund s top contributors. Shares of Shell rallied to the highest level in more than two years after the firm raised free cash flow forecasts, reinstated its cash dividend and confirmed a US$25 billion share buyback plan. A rising oil price and strong sector performance largely benefited our decision to maintain overweight energy exposure despite price volatility that accompanied fears of a supply glut earlier in the year. As we have discussed, we expected the oil price would climb toward US$60 per barrel, beyond franklintempleton.com 2

3 which it could remain relatively range-bound as price-sensitive swing producers in the North American shale fields brought supply swiftly back on line. Barring any exogenous shocks, we therefore expect renewed supply above US$60 per barrel will likely cap further significant price appreciation, and we look to selectively reduce exposure at this point in the cycle. Country Analysis From a regional standpoint, stock-specific weakness and unfavorable allocations in both the United States (in which the fund was underweight) and Europe (overweight) detracted during the quarter. Weak results in China and Japan pressured relative performance in Asia overall, though an overweight allocation to South Korea contributed. Stock selection in the United Kingdom and a lone holding in Israel further supported relative returns. Portfolio Positioning On average, the fund was overweight compared to the benchmark in the energy, health care and financials sectors. The fund was most underweight relative to the benchmark in the consumer staples, industrials and IT sectors, with no exposure to the real estate sector. Outlook & Strategy After a false dawn in 2016, value lagged growth by the most in nearly two decades in 2017, marking the tenth year out of the past 11 that global growth has bested global value. At times like this, it may be tempting for some value investors to relax their discipline and buy the expensive stocks that have been working. Yet, countering that impulse is decades of market history suggesting that starting-point valuation is virtually all that really matters when it comes to long-term results. Meanwhile, financial repression from the world s central banks appears to have forced investors farther out the risk spectrum to chase yield and growth in a market offering little of either. We view this as unsustainable for two main reasons. First, many consider zero interest-rate policies and quantitative easing to have favored capital at the expense of labor, deepening inequality and disadvantaging the majority of the electorate, whose opinions matter in a democracy. Second, financial repression could fuel potentially destabilizing asset price bubbles. Overvaluation appears to be largely concentrated in fixed income markets, as well as the growth-oriented and bond proxy stocks that have dominated this cycle. We do not know how the process of policy normalization by central banks will evolve. Nonetheless, we do believe this mature cycle will eventually change, and with it the conditions that have been so hostile to value investing. We would not want to own the leaders of the last cycle during this transition. But the stocks left behind the companies whose long-term earnings and cash flow potential we believe have been overlooked and undervalued by a narrowly focused market might be best positioned for the reversals we view as likely to unfold in the future. 6. The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager s assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund s portfolio selection process. Holdings are subject to change. Portfolio Characteristics 7,8,9 Portfolio Price to Earnings (12 Month Trailing) 17.42x 20.55x Price to Book Value 1.56x 2.34x Price to Cash Flow 7.81x 12.18x Market Capitalization (Millions in USD) 110, ,116 Portfolio Diversification Top Ten Holdings 10 Top Holdings Sector Country % SAMSUNG ELECTRONICS CO LTD Technology Hardware & Equipment South Korea 2.49 ROYAL DUTCH SHELL PLC Energy United Kingdom 2.40 CITIGROUP INC Banks United States 2.22 ORACLE CORP Software & Services United States 2.11 TWENTY-FIRST CENTURY FOX INC Media United States 2.00 BP PLC Energy United Kingdom 1.90 AMGEN INC Pharmaceuticals, Biotechnology & Life United States 1.88 Sciences TEVA PHARMACEUTICAL Pharmaceuticals, Biotechnology & Life Israel 1.88 INDUSTRIES LTD Sciences STANDARD CHARTERED PLC Banks United Kingdom 1.79 KINGFISHER PLC Retailing United Kingdom The portfolio characteristics listed are based on the fund s underlying holdings, and do not necessarily reflect the fund s characteristics. Due to data limitations all equity holdings are assumed to be the primary equity issue (usually the ordinary or common shares) of each security s issuing company. This methodology may cause small differences between the portfolio s reported characteristics and the portfolio s actual characteristics. In practice, Franklin Templeton s portfolio managers invest in the class or type of security which they believe is most appropriate at the time of purchase. The market capitalization figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. Source: Factset. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 8. Source: FactSet. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. 9. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 10. All holdings are subject to change. Holdings of the same issuers have been combined. franklintempleton.com 3

4 Geographic Weightings vs. 11,12 NORTH AMERICA EUROPE ASIA MID-EAST/AFRICA CASH & CASH EQUIVALENTS % 25% 50% 75% Sector Weightings vs. 13,14 Financials Health Care Information Technology Energy Consumer Discretionary Telecommunication Services Industrials Materials Consumer Staples Utilities Real Estate Cash & Cash Equivalents % 5% 10% 15% 20% 25% 30% Templeton Growth Fund, Inc. Templeton Growth Fund, Inc. Largest Sector Contributors vs. 15 Total Sector Effect (%) Financials 0.24 Energy 0.19 Real Estate 0.04 Contributors/detractors data shown is for the period from 10/01/2017 to 12/31/2017. Smallest Sector Contributors vs. 16 Total Sector Effect (%) Health Care Industrials Information Technology Consumer Discretionary Telecommunication Services Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Standard Deviation (%) Tracking Error (%) Information Ratio Beta Sharpe Ratio Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. 11,13. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to rounding. All holdings are subject to change. 12,14. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 15,16. Past performance is not an indicator or a guarantee of future performance. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. Source: FactSet. Important data provider notices and terms available at Total Effect represents the excess return by sector as compared to the index. Performance attribution is calculated in the base currency of the fund. 17. Beta, Information Ratio and Tracking Error information are measured against the. 18. Information Ratio is a way to evaluate a manager s ability to outperform a benchmark in relation to the risk that manager is assuming, with risk defined as deviation from the benchmark. This measure is calculated by dividing the portfolio s excess return (portfolio return less the benchmark return) by the tracking error (derived by taking the standard deviation of the monthly differences between the portfolio return and the benchmark return over time). franklintempleton.com 4

5 Investment Philosophy Templeton utilizes a disciplined, consistent approach based on three timeless principles of investing: Value Patience Bottom-up stock picking Our flexible approach is applied within a disciplined framework and seeks to identify companies trading at large discounts to their business value. Our long-term focus gives us a framework to take advantage of price volatility to reveal potential longterm investment opportunities. Patience allows for potential long-term value recognition. Our portfolio management process seeks to buy pessimism and sell optimism. We build portfolios spanning regions and sectors made up of securities identified through this process. Investment Process Identify Potential Bargains Experienced analysts Focus on global industry sectors Quantitative and qualitative assessment Identify material ESG issues In-Depth Fundamental Analysis Five-year financial forecasts Management/supplier/ competitive evaluation Upside/downside return quantification Recommendation of Bargain List candidates Research Team Evaluation Presentation of investment thesis Investment debate and critique: Devil s Advocate ESG Devil s Advocate Director of research approval Bottom-Up Portfolio Construction Investment parameters Industry and sector framework Build and diversify portfolio Long-term approach: 20% historical turnover TEMPLETON S BOTTOM-UP STOCK SELECTION PROCESS Portfolio Monitoring and Risk Management Ongoing valuation analysis Ongoing ESG monitoring Disciplined sell methodology Weekly peer review and risk analytics 19. Historical turnover is based on Templeton s experience as a Firm, over a five-year period as of most recent quarter end. The turnover is a byproduct of Templeton s long-term approach to managing portfolios, but various factors, such as a portfolio s specific investment guidelines and market or economic conditions may cause actual portfolio turnover to vary. Investment Team Portfolio Manager Years with Firm Years Experience Norman Boersma, CFA, Chief Investment Officer Tucker Scott, CFA, EVP, Portfolio Manager, Research Analyst James Harper, CFA, EVP, Portfolio Manager, Research Analyst Heather Arnold, CFA, EVP, Director of Research, Portfolio Manager, Research Analyst Christopher James Peel, CFA, VP, Portfolio Manager, Research Analyst Herbert J Arnett Jr., VP, Portfolio Manager, Research Analyst Additional Resources Global Portfolio Compliance Junior Research Analysts Global Research Library Performance Analysis and Investment Risk Group Glossary Beta: A measure of the magnitude of a portfolio s past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%. Information Ratio: In investing terminology, the ratio of expected return to risk. Usually, this statistical technique is used to measure a manager s performance against a benchmark. This measure explicitly relates the degree by which an investment has beaten the benchmark to the consistency by which the investment has beaten the benchmark. Market Capitalization: A determination of a company s value, calculated by multiplying the total number of company stock shares outstanding by the price per share. Market capitalization is expressed in millions of USD. Price to Book Value: The price per share of a stock divided by its book value (i.e., net worth) per share. For a portfolio, the value represents a weighted average of the stocks it holds. Price to Cash Flow: Supplements price/earnings ratio as a measure of relative value for a stock. For a portfolio, the value represents a weighted average of the stocks it holds. Price to Earnings (12-mo Trailing): The share price of a stock, divided by its per-share earnings over the past year. For a portfolio, the value represents a weighted average of the stocks it holds. franklintempleton.com 5

6 Sharpe Ratio: To calculate a Sharpe ratio, an asset s excess returns (its return in excess of the return generated by risk-free assets such as Treasury bills) are divided by the asset s standard deviation. Standard Deviation: A measure of the degree to which a fund s returns varies from the average of its previous returns. The larger the standard deviation, the greater the likelihood (and risk) that a fund s performance will fluctuate from the average return. Tracking Error: Measure of the deviation of the return of a fund compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment fund is managed, the smaller the tracking error. franklintempleton.com 6

7 What Are The Risks? All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. Because the Fund may invest its assets in companies in a specific region, including Europe, it is subject to greater risks of adverse developments in that region and/or the surrounding regions than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the region, even in countries in which the Fund is not invested, may adversely affect the value of securities held by the Fund. Current political uncertainty surrounding the European Union (EU) and the financial instability of some countries in the EU may increase market volatility and the economic risk of investing in companies in Europe. In addition, smaller-company stocks have historically experienced more price volatility than larger-company stocks, especially over the short term. The fund s risk considerations are discussed in the prospectus. Important Legal Information Investors should carefully consider a fund s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/ or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at: 3. Effective 01/02/1997, the fund began offering Advisor Class Shares. For periods prior to the fund s Advisor Class inception date, a restated figure is used based on the fund s oldest share class, Class A performance, excluding the effect of Class A s maximum initial sales charge but reflecting the effect of the Class A Rule 12b-1 fees; and b) for periods after the fund s Advisor Class inception date, actual Advisor Class performance is used, reflecting all charges and fees applicable to that class. Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2018 Franklin Templeton Investments. All rights reserved. 601 PP 12/17