FRANKLIN K2 ALTERNATIVE STRATEGIES FUND

Transcription

1 STATEMENT OF ADDITIONAL INFORMATION FRANKLIN K2 ALTERNATIVE STRATEGIES FUND Franklin Alternative Strategies Funds October 1, 2017 Class A Class C Class R Class R6 Advisor Class FAAAX FASCX FSKKX FASRX FABZX This Statement of Additional Information (SAI) is not a prospectus. It contains information in addition to the information in the Fund s prospectus. The Fund s prospectus, dated October 1, 2017, which we may amend from time to time, contains the basic information you should know before investing in the Fund. You should read this SAI together with the Fund s prospectus. The audited financial statements and Report of Independent Registered Public Accounting Firm in the Fund s Annual Report to shareholders, for the fiscal year ended May 31, 2017, are incorporated by reference (are legally a part of this SAI). For a free copy of the current prospectus or annual report, contact your investment representative or call (800) DIAL BEN/ Contents Goal, Strategies and Risks... 2 Officers and Trustees Fair Valuation and Liquidity Proxy Voting Policies and Procedures Management and Other Services Portfolio Transactions Distributions and Taxes Organization, Voting Rights and Principal Holders Buying and Selling Shares The Underwriter Performance Miscellaneous Information Description of Ratings Appendix A... A-1 Mutual funds, annuities, and other investment products: are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government; are not deposits or obligations of, or guaranteed or endorsed by, any bank; and are subject to investment risks, including the possible loss of principal. P.O. Box Sacramento, CA (800) DIAL BEN / SAI 10/17

2 068 SA1 03/18 SUPPLEMENT DATED MARCH 20, 2018 TO THE STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 1, 2017 OF FRANKLIN K2 ALTERNATIVE STRATEGIES FUND (Franklin Alternative Strategies Funds) The Statement of Additional Information is amended as follows: I. For the Management and Other Services Sub-Advisors section, the following paragraphs are inserted in the section beginning on page 65: Grantham, Mayo, Van Otterloo & Co. LLC (GMO), 40 Rowes Wharf, Boston, MA 02110, serves as a subadviser to a portion of the Fund s portfolio. GMO is a private investment firm that is substantially employeeowned, with no single person owning more than 25% of the firm s voting interests. H2O AM LLP (H2O), 10 Old Burlington Street, London, W1S 3AG, serves as a sub-advisor to a portion of the Fund s portfolio. H2O is a wholly owned subsidiary of H2O AM Limited, which is a majority owned subsidiary of H2O AM Holding SA. H2O AM Holding SA is majority owned by Natixis Asset Management, with Bruno Crastes, Vincent Chailley, Jean-Noel Alba, and Marc Maudhuit each holding minority interests. Natixis Asset Management is 100% owned by Natixis Global Asset Management, which is 100% owned by Natixis. Natixis is majority owned by BPCE, a banking group in France. II. The following proxy voting policies for Grantham, Mayo, Van Otterloo & Co. LLC and H2O AM LLP are inserted to Appendix A Proxy Voting Policies and Procedures : 1

3 Proxy Voting Policies and Procedures GMO LLC and related entities 1 Adoption: June 15, 2007 (collectively, GMO ) Last Revision: May 1, 2017 I. Introduction and General Principles GMO provides investment advisory services primarily to institutional, including both ERISA and non- ERISA clients, and commercial clients. GMO understands that proxy voting is an integral aspect of security ownership. Accordingly, in cases where GMO has been delegated authority to vote proxies, that function must be conducted with the same degree of prudence and loyalty accorded any fiduciary or other obligation of an investment manager. This policy permits clients of GMO to: (1) delegate to GMO the responsibility and authority to vote proxies on their behalf according to GMO s proxy voting polices and guidelines; (2) delegate to GMO the responsibility and authority to vote proxies on their behalf according to the particular client s own proxy voting policies and guidelines; or (3) elect to vote proxies themselves. In instances where clients elect to vote their own proxies, GMO shall not be responsible for voting proxies on behalf of such clients. GMO believes that the following policies and procedures are reasonably designed to ensure that proxy matters are conducted in the best interest of its clients, in accordance with GMO s fiduciary duties, applicable rules under the Investment Advisers Act of 1940 and fiduciary standards and responsibilities for ERISA clients set out in the Department of Labor interpretations. II. Proxy Voting Guidelines GMO has engaged Institutional Shareholder Services Group, Inc. ( ISS ) as its proxy voting agent to: research and make voting recommendations or, for matters for which GMO has so delegated, to make the voting determinations; ensure that proxies are voted and submitted in a timely manner; handle other administrative functions of proxy voting; maintain records of proxy statements received in connection with proxy votes and provide copies of such proxy statements promptly upon request; maintain records of votes cast; and provide recommendations with respect to proxy voting matters in general. Proxies generally will be voted in accordance with the voting recommendations contained in the applicable ISS Sustainability Proxy Voting Guidelines, as in effect from time to time, subject to such modifications as may be determined by GMO (as described below). Copies of concise summaries of the current ISS Sustainability Proxy Voting Guidelines are available through ISS Policy Gateway at To the extent GMO determines to adopt proxy voting guidelines that differ 1 Grantham, Mayo, Van Otterloo & Co. LLC, GMO Australia Limited, GMO Europe LLC, and GMO Singapore Pte. Ltd. 2

4 from the ISS proxy voting recommendations, such guidelines will be set forth on Exhibit A and proxies with respect to such matters will be voted in accordance with the guidelines set forth on Exhibit A. GMO reserves the right to modify any of the recommendations set forth in the ISS Proxy Voting Manual in the future. If any such changes are made, an amended Exhibit A to these Proxy Voting Policies and Procedures will be made available for clients. Except in instances where a GMO client retains voting authority, GMO will instruct custodians of client accounts to forward all proxy statements and materials received in respect of client accounts to ISS. In certain non-u.s. markets, shareholders who vote proxies of a non-u.s. issuer may not be able to trade in the issuer s stock for a period of time around the shareholder meeting date. In addition, there may be other costs or impediments to voting proxies in certain non-u.s. markets (e.g., receiving adequate notice, arranging for a proxy, and re-registration requirements). In non-u.s. markets with the foregoing attributes, GMO generally will determine to not vote proxies unless it believes that the potential benefits to the client of voting outweigh the impairment of portfolio management flexibility and the expected costs/impediments associated with voting. In addition, if a portfolio security is out on loan, GMO generally will not arrange to have the security recalled or to exercise voting rights associated with the security unless GMO both (1) receives adequate notice of a proposal upon which shareholders are being asked to vote (which GMO often does not receive, particularly in the case of non-u.s. issuers) and (2) GMO believes that the benefits to the client of voting on such proposal outweigh the benefits to the client of having the security remain out on loan. GMO may use third-party service providers to assist it in identifying and evaluating proposals, and to assist it in recalling loaned securities for proxy voting purposes. III. Proxy Voting Procedures GMO has a Corporate Actions Group with responsibility for administering the proxy voting process, including: Implementing and updating the applicable ISS Sustainability Proxy Voting Guidelines set forth in the ISS Proxy Voting Manual, as modified from time to time by Exhibit A hereto; Overseeing the proxy voting process; and Providing periodic reports to GMO s Compliance Department and clients as requested. There may be circumstances under which a portfolio manager or other GMO investment professional ( GMO Investment Professional ) believes that it is in the best interest of a client or clients to vote proxies in a manner inconsistent with the proxy voting guidelines described in Section II. In such an event, the GMO Investment Professional will inform GMO s Corporate Actions Group of its decision to vote such proxy in a manner inconsistent with the proxy voting guidelines described in Section II. IV. Conflicts of Interest As ISS will vote proxies in accordance with the proxy voting guidelines described in Section II, GMO believes that this process is reasonably designed to address conflicts of interest that may arise between GMO and a client as to how proxies are voted. In addition, if GMO is aware that one of the following conditions exists with respect to a proxy, GMO shall consider such event a potential material conflict of interest: GMO has a business relationship or potential relationship with the issuer; 3

5 GMO has a business relationship with the proponent of the proxy proposal; or GMO members, employees or consultants have a personal or other business relationship with the participants in the proxy contest, such as corporate directors or director candidates. In the event of a potential material conflict of interest, GMO will (i) vote such proxy according to Exhibit A (if applicable) or the specific recommendation of ISS; (ii) seek instructions from the client or request that the client votes such proxy, or (iii) abstain. All such instances shall be reported to GMO s Compliance Department at least quarterly. V. Special Procedures for Voting Shares of GMO Trust GMO s responsibility and authority to vote proxies on behalf of its clients for shares of GMO Trust, a family of registered mutual funds for which GMO serves as the investment adviser, may give rise to conflicts of interest. Accordingly, GMO will (i) vote such proxies in the best interests of its clients with respect to routine matters, including proxies relating to the election of Trustees; and (ii) with respect to matters where a conflict of interest exists between GMO and GMO Trust, such as proxies relating to a new or amended investment management contract between GMO Trust and GMO, or a re-organization of a series of GMO Trust, GMO will either (a) vote such proxies in the same proportion as the votes cast with respect to that proxy, (b) seek instructions from its clients and vote on accordance with those instructions, or (c) take such other action as GMO deems appropriate in consultation with the Trust s Chief Compliance Officer. VI. Special Procedures for Voting Shares of GMO Series Trust GMO also serves as investment adviser for the GMO Series Trust family of registered mutual funds. Each series of GMO Series Trust is a Feeder Fund investing substantially of its assets in shares of a corresponding series of GMO Trust (each a Master Fund ) in reliance on Section 12(d)(1)(E) of the Investment Company Act of 1940 (the 1940 Act ). In accordance with Section 12(d)(1)(E) of the 1940 Act, GMO will either (i) seek instructions from a Feeder Fund s holders with regard to the voting of all proxies with respect to the Feeder Fund s shares in the corresponding Master Fund and vote such proxies only in accordance with such instructions, or (ii) vote the shares of the corresponding Master Fund held by a Feeder Fund in the same proportion as the vote of all other holders of the Master Fund. VII. Recordkeeping GMO will maintain records relating to the implementation of these proxy voting policies and procedures, including: a copy of these policies and procedures which shall be made available to clients, upon request; a record of each vote cast (which ISS maintains on GMO s behalf); and each written client request for proxy records and GMO s written response to any client request for such records. Such proxy voting records shall be maintained for a period of five years. 4

6 VIII. Disclosure Except as otherwise required by law, GMO has a general policy of not disclosing to any issuer or third party how GMO or its voting delegate voted a client s proxy. Exhibit A 2 Modifications to recommendations set forth in the ISS Proxy Voting Manual Shareholder Ability to Act by Written Consent Vote FOR proposals to restrict or prohibit shareholder activity to take action by written consent. Vote AGAINST proposals to allow or make easier shareholder action by written consent. Cumulative Voting Vote FOR proposals to eliminate cumulative voting. Vote AGAINST proposals to restore or provide for cumulative voting. Incumbent Director Nominees Vote WITH management s recommendations regarding incumbent director nominees. 2 As amended February 2,

7 H2O AM LLP Voting Client Securities H2O is generally responsible for voting proxies with respect to securities held in client accounts. H2O s Proxy Voting Policies and Procedures are designed to ensure that proxies are voted in the best interests of its clients. As an investment adviser with a fiduciary responsibility to its clients, H2O generally seeks to vote proxies in a manner that maximizes the economic value of companies whose securities are held in client accounts for which H2O have been delegated voting discretion. H2O benefits from the expertise of Natixis Asset Management ( NAM ) to affect proxy voting for clients. There are two teams within NAM responsible for the exercise of the voting rights. There is a Governance and Commitment team within financial research which defines the voting policy, analyses the resolutions, challenges the financial analysts and portfolio managers, talks to the concerned companies, and coordinates the voting policy for specific resolutions. The Middle Office Trade Processing team is in charge of processing the voting instructions with the relevant custodians. Centralization makes it possible to control the enforcement of voting policy, as well as the geographic and quantitative coverage, or to intervene in case of any dysfunctions in the voting chain of events. A Voting Committee that includes portfolio managers, the Chief Investment Officer for equities, the head of Socially Responsible Investment and the governance analysts meet to consider and decide on shareholder meetings which have been submitted to its authority. If consensus cannot be achieved during the meeting, the final voting decision will be taken by the Chief Investment Officer. H2O s policy is in line with NAM s policy is to exercise voting rights, unless otherwise decided according to specific criteria. The selection criteria are geographically based and as follows: in France, where NAM is based and has in depth coverage across the market, all voting rights are exercised. In Europe (ex. France), Japan and the USA, there is a threshold of 0.01% of voting shares before rights are exercised. For issues located in other countries, the threshold is 0.05%. The thresholds shall be subject to periodic review and were updated as of January 1, There also may be exceptions made where the investment process requires the securities to remain in the portfolio during the voting period, which could generate a prejudice for clients. In most cases, all shares are voted. In some countries, however, the share-blocking period may put investors at a disadvantage by reducing the manager s necessary room for maneuver. Exceptionally, H2O may not be able to ensure effective voting for some or all of the position held in a specific company. During the proxy voting process, H2O may be confronted with conflicts of interest, especially with entities within their group. To avoid such problems, a procedure allows analysts to alert lead portfolio managers in cases where conflicts of interest have been identified. Where such a situation arises, the following procedure is followed: 1. The lead portfolio managers are warned that certain resolution(s) are in conflict with 6

8 H2O s voting policy. 2. An explanatory document is prepared. 3. A meeting of the lead portfolio managers, the compliance and legal departments is organized. 4. This committee of senior managers makes the final voting decision, but if the various parties cannot reach an agreement, the decision goes to a specific committee. H2O has developed a voting policy which sets out in detail the Adviser s policies about what considerations shall be involved in determining how the Adviser will vote, based on the facts and circumstances of each item put to proxy. Please keep this supplement for future reference. 7

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10 GOF SA8 03/18 SUPPLEMENT DATED MARCH 2, 2018 TO THE CURRENTLY EFFECTIVE STATEMENTS OF ADDITIONAL INFORMATION OF EACH OF THE FUNDS LISTED BELOW Franklin Alternative Strategies Funds Franklin K2 Alternative Strategies Fund Franklin K2 Global Macro Opportunities Fund Franklin K2 Long Short Credit Fund Franklin Pelagos Commodities Strategy Fund Franklin California Tax-Free Income Fund Franklin California Tax-Free Trust Franklin California Intermediate-Term Tax- Free Income Fund Franklin California Ultra-Short Tax-Free Income Fund Franklin Custodian Funds Franklin Dynatech Fund Franklin Focused Growth Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund Franklin Federal Tax-Free Income Fund Franklin Fund Allocator Series Franklin Corefolio Allocation Fund Franklin Founding Funds Allocation Fund Franklin LifeSmart Retirement Income Fund Franklin LifeSmart 2020 Retirement Target Fund Franklin LifeSmart 2025 Retirement Target Fund Franklin LifeSmart 2030 Retirement Target Fund Franklin LifeSmart 2035 Retirement Target Fund Franklin LifeSmart 2040 Retirement Target Fund Franklin LifeSmart 2045 Retirement Target Fund Franklin LifeSmart 2050 Retirement Target Fund Franklin LifeSmart 2055 Retirement Target Fund Franklin Conservative Allocation Fund Franklin Moderate Allocation Fund Franklin Growth Allocation Fund Franklin NextStep Conservative Fund Franklin NextStep Moderate Fund Franklin NextStep Growth Fund Franklin Payout 2018 Fund Franklin Payout 2019 Fund Franklin Payout 2020 Fund Franklin Payout 2021 Fund Franklin Payout 2022 Fund Franklin Payout 2023 Fund Franklin Global Trust Franklin Emerging Markets Debt Opportunities Fund Franklin Global Listed Infrastructure Fund Franklin Global Real Estate Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Franklin Gold and Precious Metals Fund Franklin Investors Securities Trust Franklin Adjustable U.S. Government Securities Fund Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Floating Rate Daily Access Fund Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Total Return Fund Franklin Managed Trust Franklin Rising Dividends Fund Franklin Municipal Securities Trust Franklin California High Yield Municipal Fund Franklin Tennessee Municipal Bond Fund Franklin Mutual Series Funds Franklin Mutual Beacon Fund Franklin Mutual European Fund Franklin Mutual Financial Services Fund Franklin Mutual Global Discovery Fund Franklin Mutual International Fund Franklin Mutual Quest Fund Franklin Mutual Shares Fund Franklin New York Tax-Free Income Fund Franklin New York Tax-Free Trust Franklin New York Intermediate-Term Tax- Free Income Fund Franklin Strategic Mortgage Portfolio Franklin Strategic Series Franklin Biotechnology Discovery Fund Franklin Flexible Alpha Fund Franklin Focused Core Equity Fund Franklin Growth Opportunities Fund Franklin Natural Resources Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Strategic Income Fund Franklin High Income Trust Franklin High Income Fund Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund Franklin Tax-Free Trust Franklin Federal Intermediate-Term Tax- Free Income Fund Franklin Federal Limited-Term Tax-Free Income Fund Franklin High Yield Tax-Free Income Fund Franklin Massachusetts Tax-Free Income Fund Franklin New Jersey Tax-Free Income Fund Franklin Alabama Tax-Free Income Fund Franklin Florida Tax-Free Income Fund Franklin Georgia Tax-Free Income Fund Franklin Kentucky Tax-Free Income Fund Franklin Louisiana Tax-Free Income Fund Franklin Maryland Tax-Free Income Fund Franklin Missouri Tax-Free Income Fund Franklin North Carolina Tax-Free Income Fund Franklin Virginia Tax-Free Income Fund Franklin Arizona Tax-Free Income Fund Franklin Colorado Tax-Free Income Fund Franklin Connecticut Tax-Free Income Fund Franklin Michigan Tax-Free Income Fund 1 Franklin Minnesota Tax-Free Income Fund Franklin Ohio Tax-Free Income Fund Franklin Oregon Tax-Free Income Fund Franklin Pennsylvania Tax-Free Income Fund Franklin Templeton Global Trust Templeton Global Currency Fund Franklin Templeton International Trust Franklin India Growth Fund Franklin Templeton Money Fund Trust Franklin Templeton U.S. Government Money Fund Franklin U.S. Government Money Fund Franklin Value Investors Trust Franklin Balance Sheet Investment Fund Franklin Microcap Value Fund Franklin Small Cap Value Fund Institutional Fiduciary Trust Money Market Portfolio Templeton China World Fund Templeton Developing Markets Trust Templeton Funds Templeton Foreign Fund Templeton World Fund Templeton Global Investment Trust Templeton Dynamic Equity Fund Templeton Emerging Markets Balanced Fund Templeton Emerging Markets Small Cap Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund Templeton Global Balanced Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund, Inc. Templeton Income Trust Templeton Emerging Markets Bond Fund Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund Templeton Institutional Funds Emerging Markets Series Foreign Smaller Companies Series Global Equity Series International Equity Series

11 I. For all Funds, the following is added to the Goals, Strategies and Risks Glossary of Investments, Techniques, Strategies and Their Risks Foreign securities section of the Statement of Additional Information ( SAI ): For purposes of the Fund s prospectus and SAI, foreign securities refers to non-u.s. securities. II. For Franklin Corefolio Allocation Fund, Franklin Founding Funds Allocation Fund, Franklin LifeSmart Retirement Income Fund, Franklin LifeSmart 2020 Retirement Target Fund, Franklin LifeSmart 2025 Retirement Target Fun, Franklin LifeSmart 2030 Retirement Target Fund, Franklin LifeSmart 2035 Retirement Target Fund, Franklin LifeSmart 2040 Retirement Target Fund, Franklin LifeSmart 2045 Retirement Target Fund, Franklin LifeSmart 2050 Retirement Target Fund, Franklin LifeSmart 2055 Retirement Target Fund, Franklin Conservative Allocation Fund, Franklin Moderate Allocation Fund, Franklin Growth Allocation Fund, Franklin K2 Alternative Strategies Fund, Franklin Mutual Beacon Fund, Franklin Mutual European Fund, Franklin Mutual Financial Services Fund, Franklin Mutual Global Discovery Fund, Franklin Mutual International Fund, Franklin Mutual Quest Fund, Franklin Mutual Shares Fund, Templeton China World Fund, Templeton Developing Markets Trust, Templeton Dynamic Equity Fund, Templeton Emerging Markets Balanced Fund, Templeton Emerging Markets Small Cap Fund, Templeton Foreign Fund, Templeton World Fund, Templeton Foreign Smaller Companies Fund, Templeton Frontier Markets Fund, Templeton Global Balanced Fund, Templeton Global Currency Fund, Templeton Global Smaller Companies Fund, Templeton Global Opportunities Trust, Templeton Growth Fund, Inc., Emerging Markets Series, Foreign Smaller Companies Series, Global Equity Series, International Equity Series, Templeton Emerging Markets Bond Fund, Templeton Global Bond Fund, Templeton Global Total Return Fund and Templeton International Bond Fund, the following is added to the Goals, Strategies and Risks Glossary of Investments, Techniques, Strategies and Their Risks Developing markets or emerging markets section of the SAI: Investing through the Bond Connect Program. Foreign investors may invest in China Interbank bonds traded on the China Interbank Bond Market ( CIBM ) through the China Hong Kong Bond Connect program ( Bond Connect ). In China, the Hong Kong Monetary Authority Central Money Markets Unit holds Bond Connect securities on behalf of ultimate investors (such as the Fund) in accounts maintained with a China-based custodian (either the China Central Depository & Clearing Co. or the Shanghai Clearing House). This recordkeeping system subjects the Fund to various risks, including the risk that the Fund may have a limited ability to enforce rights as a bondholder and the risks of settlement delays and counterparty default of the Hong Kong sub-custodian. In addition, enforcing the ownership rights of a beneficial holder of Bond Connect securities is untested and courts in China have limited experience in applying the concept of beneficial ownership. Bond Connect uses the trading infrastructure of both Hong Kong and China and is not available on trading holidays in Hong Kong. As a result, prices of securities purchased through Bond Connect may fluctuate at times when a Fund is unable to add to or exit its position. Securities offered through Bond Connect may lose their eligibility for trading through the program at any time. If Bond Connect securities lose their eligibility for trading through the program, they may be sold but can no longer be purchased through Bond Connect. Bond Connect is subject to regulation by both Hong Kong and China and there can be no assurance that further regulations will not affect the availability of securities in the program, the frequency of redemptions or other limitations. Bond Connect trades are settled in Chinese currency, the renminbi ( RMB ). It cannot be guaranteed that investors will have timely access to a reliable supply of RMB in Hong Kong. Bond Connect is relatively new and its effects on the Chinese interbank bond market are uncertain. In addition, the trading, settlement and IT systems required for non-chinese investors in Bond Connect are relatively new. In the event of systems malfunctions, trading via Bond Connect could be disrupted. In addition, the Bond Connect program may be subject to further interpretation and guidance. There can be no assurance as to the program s continued existence or whether future developments regarding the program may restrict or adversely affect the Fund s investments or returns. Finally, uncertainties in China tax rules governing taxation of income and gains from investments via Bond Connect could result in unexpected tax liabilities for a Fund. III. The following is added to the Officers and Trustees Independent Board Members section of the SAI for all Funds except Franklin Mutual Beacon Fund, Franklin Mutual European Fund, Franklin Mutual Financial Services Fund, Franklin Mutual Global Discovery Fund, Franklin Mutual International Fund, Franklin Mutual Quest Fund, Franklin Mutual Shares Fund, Franklin Balance Sheet Investment Fund, Franklin Microcap Value Fund, Franklin Small Cap Value Fund, Franklin K2 Alternative Strategies Fund, Franklin K2 Global Macro Opportunities Fund, Franklin K2 Long Short Credit Fund, Franklin Pelagos Commodities Strategy Fund, Templeton Global Currency Fund, Templeton China World Fund, Templeton Developing Markets Trust, Templeton Foreign Fund, Templeton World Fund, Templeton Dynamic Equity Fund, Templeton Emerging Markets Balanced Fund, Templeton Emerging Markets Small Cap Fund, Templeton Foreign Smaller Companies Fund, Templeton Frontier Markets Fund, Templeton Global Balanced Fund, Templeton Global Opportunities Trust, Templeton Global Smaller Companies Fund, Templeton Growth Fund, Inc., Templeton Emerging Markets Bond Fund, Templeton Global Bond Fund, Templeton Global 2

12 Total Return Fund, Templeton International Bond Fund, Emerging Markets Series, Foreign Smaller Companies Series, Global Equity Series and International Equity Series: Terrence J. Checki (1945) One Franklin Parkway San Mateo, CA Trustee Since December Hess Corporation (exploration of oil and gas) (2014-present). Principal Occupation During at Least the Past 5 Years: Member of the Council on Foreign Relations (1996-present); Member of the National Committee on U.S.-China Relations (1999-present); member of the Board of Trustees of the Economic Club of New York (2013 -present); member of the Board of Trustees of the Foreign Policy Association (2005-present) and member of various other boards of trustees and advisory boards; and formerly, Executive Vice President of the Federal Reserve Bank of New York and Head of its Emerging Markets and Internal Affairs Group and Member of Management Committee ( ); and Visiting Fellow at the Council on Foreign Relations (2014). IV. The following replaces the first paragraph under the Officers and Trustees Board committees section of the SAI for all Funds except Franklin Mutual Beacon Fund, Franklin Mutual European Fund, Franklin Mutual Financial Services Fund, Franklin Mutual Global Discovery Fund, Franklin Mutual International Fund, Franklin Mutual Quest Fund, Franklin Mutual Shares Fund, Franklin Balance Sheet Investment Fund, Franklin Microcap Value Fund, Franklin Small Cap Value Fund, Franklin K2 Alternative Strategies Fund, Franklin K2 Global Macro Opportunities Fund, Franklin K2 Long Short Credit Fund, Franklin Pelagos Commodities Strategy Fund, Templeton Global Currency Fund, Templeton China World Fund, Templeton Developing Markets Trust, Templeton Foreign Fund, Templeton World Fund, Templeton Dynamic Equity Fund, Templeton Emerging Markets Balanced Fund, Templeton Emerging Markets Small Cap Fund, Templeton Foreign Smaller Companies Fund, Templeton Frontier Markets Fund, Templeton Global Balanced Fund, Templeton Global Opportunities Trust, Templeton Global Smaller Companies Fund, Templeton Growth Fund, Inc., Templeton Emerging Markets Bond Fund, Templeton Global Bond Fund, Templeton Global Total Return Fund, Templeton International Bond Fund, Emerging Markets Series, Foreign Smaller Companies Series, Global Equity Series and International Equity Series: Board committees The board maintains two standing committees: the Audit Committee and the Nominating Committee. The Audit Committee is generally responsible for recommending the selection of the Trust's independent registered public accounting firm (auditors), including evaluating their independence and meeting with such auditors to consider and review matters relating to the Trust's financial reports and internal controls. The Audit Committee is comprised of the following independent trustees of the Trust: Terrence J. Checki, Mary C. Choksi, Edith E. Holiday, J. Michael Luttig, Larry D. Thompson and John B. Wilson. The Nominating Committee is comprised of the following independent trustees of the Trust: Harris J. Ashton, Terrence J. Checki, Mary C. Choksi, Edith E. Holiday, J. Michael Luttig, Larry D. Thompson and John B. Wilson. V. The following replaces the first paragraph under the Officers and Trustees Trustee Qualifications section of the SAI for all Funds except Franklin Mutual Beacon Fund, Franklin Mutual European Fund, Franklin Mutual Financial Services Fund, Franklin Mutual Global Discovery Fund, Franklin Mutual International Fund, Franklin Mutual Quest Fund, Franklin Mutual Shares Fund, Franklin Balance Sheet Investment Fund, Franklin Microcap Value Fund, Franklin Small Cap Value Fund, Franklin K2 Alternative Strategies Fund, Franklin K2 Global Macro Opportunities Fund, Franklin K2 Long Short Credit Fund, Franklin Pelagos Commodities Strategy Fund, Templeton Global Currency Fund, Templeton China World Fund, Templeton Developing Markets Trust, Templeton Foreign Fund, Templeton World Fund, Templeton Dynamic Equity Fund, Templeton Emerging Markets Balanced Fund, Templeton Emerging Markets Small Cap Fund, Templeton Foreign Smaller Companies Fund, Templeton Frontier Markets Fund, Templeton Global Balanced Fund, Templeton Global Opportunities Trust, Templeton Global Smaller Companies Fund, Templeton Growth Fund, Inc., Templeton Emerging Markets Bond Fund, Templeton Global Bond Fund, Templeton Global Total Return Fund, Templeton International Bond Fund, Emerging Markets Series, Foreign Smaller Companies Series, Global Equity Series and International Equity Series: Trustee qualifications Information on the Fund s officers and board members appears above including information on the business activities of board members during the past five years and beyond. In addition to personal qualities, such as integrity, the role of an effective Fund board member inherently requires the ability to comprehend, discuss and critically analyze materials and issues presented in exercising judgments and reaching informed conclusions relevant to his or her duties and fiduciary obligations. The board believes that the specific background of each board member evidences such ability and is appropriate to his or her serving on the Fund s board. As indicated, Harris J. Ashton has served as a chief executive officer of a NYSE-listed public corporation; Terrence J. Checki has served as a senior executive of a Federal Reserve Bank and has vast experience evaluating economic forces and their impact on markets, including emerging markets; Mary C. Choksi has an extensive background in asset management, including founding an investment 3

13 management firm; Larry D. Thompson and Edith E. Holiday each have legal backgrounds, including high level legal positions with departments of the U.S. government; J. Michael Luttig has fifteen years of judicial experience as a Federal Appeals Court Judge and eleven years of experience as Executive Vice President and General Counsel of a major public company; John B. Wilson has served as President of International for a Fortune 150 company, chief operating officer of a NYSE-listed public corporation, chief financial officer of a NASDAQ-listed public corporation and partner of a global strategy consulting firm; and Gregory E. Johnson and Rupert H. Johnson, Jr. are both high ranking executive officers of Franklin Templeton Investments. Please keep this supplement with your prospectus for future reference. 4

14 GOF SA7 02/18 SUPPLEMENT DATED FEBRUARY 1, 2018 TO THE CURRENTLY EFFECTIVE STATEMENT OF ADDITIONAL INFORMATION OF EACH OF THE FUNDS LISTED BELOW Franklin Alternative Strategies Funds Franklin K2 Alternative Strategies Fund Franklin K2 Global Macro Opportunities Fund Franklin K2 Long Short Credit Fund Franklin Pelagos Commodities Strategy Fund Franklin California Tax-Free Income Fund Franklin California Tax-Free Trust Franklin California Intermediate-Term Tax- Free Income Fund Franklin California Ultra-Short Tax-Free Income Fund Franklin Custodian Funds Franklin Dynatech Fund Franklin Focused Growth Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund Franklin Federal Tax-Free Income Fund Franklin Fund Allocator Series Franklin Corefolio Allocation Fund Franklin Founding Funds Allocation Fund Franklin LifeSmart Retirement Income Fund Franklin LifeSmart 2020 Retirement Target Fund Franklin LifeSmart 2025 Retirement Target Fund Franklin LifeSmart 2030 Retirement Target Fund Franklin LifeSmart 2035 Retirement Target Fund Franklin LifeSmart 2040 Retirement Target Fund Franklin LifeSmart 2045 Retirement Target Fund Franklin LifeSmart 2050 Retirement Target Fund Franklin LifeSmart 2055 Retirement Target Fund Franklin Conservative Allocation Fund Franklin Moderate Allocation Fund Franklin Growth Allocation Fund Franklin NextStep Conservative Fund Franklin NextStep Growth Fund Franklin NextStep Moderate Fund Franklin Payout 2018 Fund Franklin Payout 2019 Fund Franklin Payout 2020 Fund Franklin Payout 2021 Fund Franklin Payout 2022 Fund Franklin Payout 2023 Fund Franklin Global Trust Franklin Global Listed Infrastructure Fund Franklin Global Real Estate Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Franklin Gold and Precious Metals Fund Franklin Investors Securities Trust Franklin Adjustable U.S. Government Securities Fund Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Floating Rate Daily Access Fund Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Total Return Fund Franklin Managed Trust Franklin Rising Dividends Fund Franklin Mutual Series Funds Franklin Mutual Beacon Fund Franklin Mutual European Fund Franklin Mutual Financial Services Fund Franklin Mutual Global Discovery Fund Franklin Mutual International Fund Franklin Mutual Quest Fund Franklin Mutual Shares Fund Franklin New York Tax-Free Trust Franklin New York Intermediate-Term Tax- Free Income Fund Franklin Strategic Mortgage Portfolio Franklin Strategic Series Franklin Biotechnology Discovery Fund Franklin Flexible Alpha Fund Franklin Focused Core Equity Fund Franklin Global Government Bond Fund Franklin Growth Opportunities Fund Franklin Natural Resources Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Strategic Income Fund Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund Franklin High Income Trust Franklin High Income Fund Franklin New York Tax-Free Income Fund Franklin Municipal Securities Trust Franklin California High Yield Municipal Fund Franklin Tennessee Municipal Bond Fund Franklin Tax-Free Trust Franklin Alabama Tax-Free Income Fund Franklin Arizona Tax-Free Income Fund Franklin Colorado Tax-Free Income Fund Franklin Connecticut Tax-Free Income Fund Franklin Federal Intermediate-Term Tax- Free Income Fund Franklin Federal Limited-Term Tax-Free Income Fund Franklin Florida Tax-Free Income Fund Franklin Georgia Tax-Free Income Fund Franklin High Yield Tax-Free Income Fund Franklin Kentucky Tax-Free Income Fund Franklin Louisiana Tax-Free Income Fund Franklin Maryland Tax-Free Income Fund Franklin Massachusetts Tax-Free Income Fund Franklin Michigan Tax-Free Income Fund Franklin Minnesota Tax-Free Income Fund Franklin Missouri Tax-Free Income Fund Franklin New Jersey Tax-Free Income Fund Franklin North Carolina Tax-Free Income Fund Franklin Ohio Tax-Free Income Fund Franklin Oregon Tax-Free Income Fund Franklin Pennsylvania Tax-Free Income Fund Franklin Virginia Tax-Free Income Fund Franklin Templeton Global Trust Templeton Global Currency Fund Franklin Templeton International Trust Franklin India Growth Fund Franklin Templeton Money Fund Trust Franklin Templeton U.S. Government Money Fund Franklin U.S. Government Money Fund Franklin Value Investors Trust Franklin Balance Sheet Investment Fund Franklin Microcap Value Fund Franklin Small Cap Value Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Funds Templeton Foreign Fund Templeton World Fund Templeton Global Investment Trust Templeton Dynamic Equity Fund Templeton Emerging Markets Balanced Fund Templeton Emerging Markets Small Cap Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund Templeton Global Balanced Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund, Inc. Templeton Income Trust Templeton Emerging Markets Bond Fund Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund Templeton Institutional Funds Emerging Markets Series Foreign Smaller Companies Series Global Equity Series International Equity Series 1

15 The statement of additional information is amended as follows: I. The Buying and Selling Shares Share certificates section is revised as follows: Share certificates We will credit your shares to your Fund account and we do not issue share certificates. This eliminates the costly problem of replacing lost, stolen or destroyed certificates. Any outstanding share certificates must be returned to the Fund if you want to sell, exchange or reregister those shares or if you would like to start a systematic withdrawal plan. The certificates should be properly endorsed. You can do this either by signing the back of the certificate or by completing a share assignment form. For your protection, you may prefer to complete a share assignment form and to send the certificate and assignment form in separate envelopes. We do not issue new share certificates if any outstanding share certificates are returned to the Fund. If a certificate is lost, stolen or destroyed, you may have to pay an insurance premium of up to 2% of the value of the certificate to cancel it. II. The eleventh paragraph under Buying and Selling Shares General Information section is revised as follows: The Fund or its transfer agent may be required (i) pursuant to a validly issued levy, garnishment or other form of legal process, to sell your shares and remit the proceeds to a levying officer or other recipient; or (ii) pursuant to a final order of forfeiture or other form of legal process, to sell your shares and remit the proceeds to the U.S. or state government as directed. Please keep this supplement with your statement of additional information for future reference. 2

16 Goal, Strategies and Risks The following information provided with respect to the Fund is in addition to that included in the Fund s prospectus. In addition to the main types of investments and strategies undertaken by the Fund as described in the prospectus, the Fund also may invest in other types of instruments and engage in and pursue other investment strategies, which are described in this SAI. Investments and investment strategies with respect to the Fund are discussed in greater detail in the section below entitled Glossary of Investments, Techniques, Strategies and Their Risks. Generally, the policies and restrictions discussed in this SAI and in the prospectus apply when the Fund makes an investment. In most cases, the Fund is not required to sell an investment because circumstances change and the investment no longer meets one or more of the Fund s policies or restrictions. If a percentage restriction or limitation is met at the time of investment, a later increase or decrease in the percentage due to a change in the value or liquidity of portfolio investments will not be considered a violation of the restriction or limitation, with the exception of the Fund s limitations on borrowing as described herein or unless otherwise noted herein. Incidental to the Fund s other investment activities, including in connection with a bankruptcy, restructuring, workout, or other extraordinary events concerning a particular investment the Fund owns, the Fund may receive securities (including convertible securities, warrants and rights), real estate or other investments that the Fund normally would not, or could not, buy. If this happens, the Fund may, although it is not required to, sell such investments as soon as practicable while seeking to maximize the return to shareholders. The Fund has adopted certain investment restrictions as fundamental and non-fundamental policies. A fundamental policy may only be changed if the change is approved by (i) more than 50% of the Fund s outstanding shares or (ii) 67% or more of the Fund s shares present at a shareholder meeting if more than 50% of the Fund s outstanding shares are represented at the meeting in person or by proxy, whichever is less. A non-fundamental policy may be changed without the approval of shareholders. For more information about the restrictions of the Investment Company Act of 1940 (1940 Act) on the Fund with respect to (1) borrowing and senior securities, see Glossary of Investments, Techniques, Strategies and Their Risks - Borrowing ; and (2) lending, see Glossary of Investments, Techniques, Strategies and Their Risks - Corporate Loans, Assignments and Participations below. Fundamental Investment Policies The Fund may not: 1. Borrow money, except to the extent permitted by the 1940 Act, or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the U.S. Securities and Exchange Commission (SEC). 2. Act as an underwriter, except to the extent the Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares. 3. Make loans if, as a result, more than 33 1/3% of its total assets would be lent to other persons, including other investment companies to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. This limitation does not apply to (i) the lending of portfolio securities, (ii) the purchase of debt securities, other debt instruments, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies, and (iii) repurchase agreements to the extent the entry into a repurchase agreement is deemed to be a loan. 4. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) purchasing or selling securities or instruments secured by real estate or interests therein, securities or instruments representing interests in real estate or securities or instruments of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, and (ii) making, purchasing or selling real estate mortgage loans. 5. Purchase or sell physical commodities, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) purchasing or selling commodity-linked derivative instruments, including, but not limited to, swap agreements; commodity-linked notes; options on commodities, futures contracts and options on futures contracts with respect to indices or individual commodities or otherwise; and foreign currency transactions, including, without limitation, forward currency contracts and futures contracts or (ii) investing in securities or other instruments that are linked to or secured by physical commodities or related indices. 6. Issue senior securities, except to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. 7. Invest more than 25% of the Fund s net assets in securities of issuers in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies whether registered or excluded from registration under Section 3(c) of the 1940 Act). 8. Purchase the securities of any one issuer (other than the U.S. government or any of its agencies or instrumentalities or securities of other investment companies, whether registered or excluded from registration under Section 3(c) of the 1940 Act) if immediately after such investment (i) more than 5% of the value of the Fund s total assets would be invested in such issuer or (ii) more than 10% of the outstanding voting securities of such issuer 2

17 would be owned by the Fund, except that up to 25% of the value of the Fund s total assets may be invested without regard to such 5% and 10% limitations. Non-Fundamental Investment Policies The Fund s investment goal is to seek capital appreciation with lower volatility relative to the broad equity markets. The Fund s investment goal is non-fundamental, which means it may be changed by the board of trustees without shareholder approval. Shareholders will be given at least 60 days advance notice of any change to the Fund s investment goal. Additional Strategies The Fund seeks to achieve its investment goal by allocating its assets across multiple non-traditional or alternative strategies, including, but not limited to, Long Short Equity, Relative Value, Event Driven and Global Macro, each of which is described in the Fund s prospectus. The Fund is structured as a multimanager fund and the Fund s investment manager has overall responsibility for the Fund s investments. The Fund s investment manager, K2/D&S Management Co., L.L.C. (K2 Advisors), allocates the Fund s assets among multiple sub-advisors who, as of the date of this SAI, are unaffiliated with K2 Advisors and who will implement one or more non-traditional or alternative investment strategies (Sub-Advisors). In trying to achieve its investment goal, the Fund may also invest, either directly or indirectly in the types of instruments or engage in the types of transactions identified below and in the section Glossary of Investments, Techniques, Strategies and Their Risks, which also describes the risks associated with these investment policies. The Fund may or may not use all of these techniques at any one time. Unless the context otherwise requires, references under Glossary of Investments, Techniques, Strategies and Their Risks in this SAI to the investment manager also apply to the Sub-Advisors. Glossary of Investments, Techniques, Strategies and Their Risks Certain words or phrases may be used in descriptions of Fund investment policies and strategies to give investors a general sense of the Fund s levels of investment. They are broadly identified with, but not limited to, the following percentages of Fund total assets: small portion less than 10% portion 10% to 25% significant 25% to 50% substantial 50% to 66% primary 66% to 80% predominant 80% or more If the Fund intends to limit particular investments or strategies to no more than specific percentages of Fund assets, the prospectus or SAI will clearly identify such limitations. The percentages above are not limitations unless specifically stated as such in the Fund s prospectus or elsewhere in this SAI. The Fund may invest in securities that are rated by various rating agencies such as Moody s Investors Service (Moody s) and Standard & Poor s Financial Services (S&P ), as well as securities that are unrated. The value of your shares in the Fund will increase as the value of the investments owned by the Fund increases and will decrease as the value of the Fund s investments decreases. In this way, you participate in any change in the value of the investments owned by the Fund. In addition to the factors that affect the value of any particular investment that the Fund owns, the value of the Fund s shares may also change with movement in the investment markets as a whole. The following is a description of various types of securities, instruments and techniques that may be purchased and/or used by the Fund: Asset-backed securities Asset-backed securities represent interests in a pool of loans, leases or other receivables. The assets underlying asset-backed securities may include receivables on home equity loans, credit card loans, and automobile, mobile home and recreational vehicle loans and leases and other assets. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties and may have adjustable interest rates that reset at periodic intervals. The credit quality of most asset-backed securities depends primarily on the credit quality of the underlying assets, how well the issuers of the securities are insulated from the credit risk of the originator or affiliated entities, and the amount of credit support (if any) provided to the securities. Credit support for asset-backed securities is intended to lessen the effect of failures by obligors (such as individual borrowers or leasers) on the underlying assets to make payments. Credit support generally falls into two categories: (i) liquidity protection; and (ii) protection against losses from the default by an obligor on the underlying assets. Liquidity protection refers to advances, generally provided by the entity administering the pool of assets, intended to ensure that the receipt of payments due on the underlying pool is timely. Protection against losses from the default by an obligor can enhance the likelihood of payments of the obligations on at least some of the assets in the pool. Protection against losses from default may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties. Alternatively, this protection may be provided through various means of structuring the transaction, or through a combination of these approaches. Examples of credit support arising out of the structure of the transaction include senior subordinated securities (securities with one or more classes that are subordinate to the other classes with respect to the payment of principal and interest, with the result that defaults on the underlying assets should be borne first by the holders of the subordinated class), creation of reserve funds (where cash or investments, sometimes funded from a 3