Templeton Emerging Markets Small Cap Fund Advisor Class

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1 Templeton Emerging Markets Small Cap Fund Advisor Class Value Equity Product Profile Product Details 1 Fund Assets $1,088,378, Fund Inception Date 10/02/2006 Number of Issuers 136 NASDAQ Symbol TEMZX Maximum Sales Charge Investment Style Value Benchmark MSCI Emerging Markets Small Cap Index Lipper Classification Emerging Markets Funds Morningstar Category Diversified Emerging Mkts Dividend Frequency Annually in December Asset Allocation 2 EQUITY Fund Description The fund seeks long-term capital appreciation by investing at least 80% of its net assets in securities of small-cap companies located in emerging-market countries. Performance Data 4 Average Annual Total Returns 5 (%) Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs (10/02/2006) Advisor Class MSCI Emerging Markets Small Cap Index 30% 20% 10% 0% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception Advisor Class CASH & CASH EQUIVALENTS 5.45 Third-Party Fund Data 0% 25% 50% 75% 100% 125% Overall Morningstar Rating TM 3 As of 03/31/2018 the fund s Advisor Class shares received a 4 star overall Morningstar Rating, measuring risk-adjusted returns against 666, 474 and 194 U.S.-domiciled Diversified Emerging Mkts mutual funds and exchange traded funds over the 3-, 5- and 10- year periods, respectively. A fund s overall rating is derived from a weighted average of the performance figures associated with its 3-, 5- and 10-year (if applicable) rating metrics. Total Annual Operating Expenses With Waiver:1.72% Without Waiver: 1.73% 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. The fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 07/31/2018. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower. Calendar Year Returns (%) Advisor Class MSCI Emerging Markets Small Cap Index 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 Portfolio Manager Insight 6 Market Review Emerging-market (EM) equities posted modest gains in a volatile quarter marked by concerns that sent developed-market stocks lower. Economic optimism that buoyed returns at the start of the year gave way to worries of resurgent US inflation, followed by rising trade tensions as the United States announced a series of protectionist trade measures. EM small-cap equities nudged higher over the quarter but lagged their large-cap peers. Within the benchmark, Latin America led the way up as Mexico benefited from strength in the peso. The Middle East and Africa advanced as Egypt rallied, helped by an aggressive easing in monetary policy and an upgraded economic growth forecast for the current fiscal year. However, Asia declined, mostly because India fell following the reintroduction of a longterm capital gains tax on equities. At the sector level, health care and real estate were the top gainers, followed by consumer staples; telecommunication services, utilities and financials fell the most. Performance Review The fund rose over the quarter. Across markets, China and Vietnam drove absolute returns higher, followed by South Korea. Conversely, India was the largest detractor, followed by Brazil and Hong Kong. In terms of sectors, health care, information technology (IT) and real estate were the top contributors, while financials, industrials and consumer discretionary hampered results the most. In China, e-commerce solutions provider Baozun rallied on better-than-expected quarterly earnings and management s positive outlook for 2018 sales. Lens maker Sunny Optical Technology surged as its full-year profit beat expectations, thanks to strong sales of handset and vehicle lens sets. Vietnam-based industrial company Hoa Phat climbed, as did property developer Vingroup. Hoa Phat reported record-high earnings for 2017, supported by strength in its core steel production business. In South Korea, biopharmaceutical firm Medy-Tox rose after posting higher-than-expected quarterly earnings, aided by robust exports. Sportswear distributor Fila Korea was another contributor to returns. In India, however, Federal Bank lost ground as the commercial bank s quarterly net profit missed market expectations. Diversified financial services group Bajaj Holdings & Investment finished lower. Redington India fell as the IT and consumer electronics product distributor posted lower quarterly earnings amid weaker-than-expected demand for Apple s new iphone models. Brazil-based private education group Ser Educacional declined after posting lower full-year earnings as its expansion plans weighed on margins. In Hong Kong, Luk Fook fell as the jewelry retailer reported weaker same-store sales in China for the quarter ended December Other individual detractors included South Korea-based auto parts manufacturer Mando and Taiwan-based electronics component maker Primax Electronics. Portfolio Positioning We construct funds on a stock-by-stock basis, and market and sector weightings are an outcome of this process. At the end of the first quarter, the fund s largest absolute weightings were in India, China and South Korea. The largest sector exposures were to consumer discretionary, IT and health care. Outlook & Strategy We believe prospects for emerging markets remain sound despite the recent increase in volatility. Emerging markets have historically bounced back from external shocks, and they displayed a healthy resilience amid choppy trading in early We still see strong tailwinds underpinning EM equities even as we are mindful of the challenges that may arise. Importantly, EM economies look poised for further growth. The International Monetary Fund estimates 4.9% gross domestic product growth for emerging markets in 2018, up from 4.7% in While protectionist trade actions taken by the United States have cast a shadow over the synchronized global growth that lifted stock markets, the long-term outcome remains to be seen. The scope and strength of international trade flows should not be underestimated, as shown by the historical growth in intra-asia trade. We believe the key drivers for emerging markets technology and consumerism remain intact. EM companies have not only embraced the use of technology but have also become global innovators in many areas, ranging from e-commerce to mobile banking and more. Meanwhile, we expect demand for basic and aspirational goods and services to continue growing as incomes head higher. In this environment, business opportunities are plentiful, and we find that many overlooked and under-researched small-cap companies are uniquely positioned to capture them. As fundamental investors, we continue to look for what we think are attractive stocks in this space. 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. franklintempleton.com 2

3 Portfolio Characteristics 7,8,9 Portfolio Price to Earnings (12 Month Trailing) 15.66x 20.82x Price to Book Value 1.86x 1.53x Price to Cash Flow 11.23x 11.10x Market Capitalization (Millions in USD) 2,645 1,540 Portfolio Diversification Top Ten Holdings 10 Top Holdings Sector Country % BAJAJ HOLDINGS & INVESTMENT Diversified Financials India 3.47 LTD BAOZUN INC Software & Services China 2.54 APOLLO TYRES LTD Automobiles & Components India 2.53 HOA PHAT GROUP JSC Materials Vietnam 2.06 MEDY-TOX INC Pharmaceuticals, Biotechnology & Life South Korea 1.91 Sciences SUNNY OPTICAL TECHNOLOGY Technology Hardware & Equipment China 1.70 GROUP CO LTD FILA KOREA LTD Consumer Durables & Apparel South Korea 1.64 TATA CHEMICALS LTD Materials India 1.64 FEDERAL BANK LTD Banks India 1.60 PRIMAX ELECTRONICS LTD Technology Hardware & Equipment Taiwan 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. Holdings of the same issuers have been combined. Top ten holdings information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. The information provided is not a recommendation to purchase, sell, or hold any particular security. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise be included. franklintempleton.com 3

4 Geographic Weightings vs. 11,12 India China South Korea Taiwan Vietnam Turkey Russia Egypt Brazil Hong Kong Thailand Poland Sri Lanka Mexico Indonesia United States Switzerland Philippines Saudi Arabia United Kingdom United Arab Emirates Czech Republic Malaysia Georgia Peru Hungary Pakistan Austria Chile Nigeria Botswana Kuwait Cash & Cash Equivalents % 25% Sector Weightings vs. 13,14 Consumer Discretionary Information Technology Health Care Financials Consumer Staples Materials Industrials Real Estate Energy Telecommunication Services Utilities Cash & Cash Equivalents % 5% 10% 15% 20% 25% Templeton Emerging Markets Small Cap Fund Templeton Emerging Markets Small Cap Fund Largest Sector Contributors vs. 15 Total Sector Effect (%) Information Technology 0.64 Materials 0.50 Consumer Staples 0.41 Health Care 0.34 Utilities 0.18 Contributors/detractors data shown is for the period from 01/01/2018 to 03/31/2018. Smallest Sector Contributors vs. 16 Total Sector Effect (%) Consumer Discretionary Financials Industrials Telecommunication Services ,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. franklintempleton.com 4

5 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. 10-Year Risk vs. Return as of 03/31/ ,20 Templeton Emerging Markets Small Cap Fund vs. MSCI Emerging Markets Small Cap Index Return (%) Risk (Standard Deviation) (%) Templeton Emerging Markets Small Cap Fund Investment Philosophy Templeton s approach is based on presence on the ground a network of local offices, onsite company research visits, and more than a decade of pioneering new emerging markets and investment opportunities. The advantage in our process comes from our inhouse investment research capabilities, the length of our track record, and the independence of the emerging markets team and process. Templeton s approach to the market is founded on three tenets: Value, Patience, and Bottom-Up stock selection. Value We seek companies trading at a substantial discount to what our research indicates the company may be worth. Patience Security prices can fluctuate more widely than underlying security values. In our opinion, market efficiencies should recognize and correct these security prices over time. Bottom-Up We identify value through rigorous fundamental analysis of a company s business to determine what we consider its economic worth to be based on future earnings potential, cash flow or asset value potential. Templeton s investment process involves five steps and is designed to add value for investors over the long term. Investment Process STEP 1 Identify stocks for potential purchase STEP 2 Analyze securities STEP 3 Evaluate securities with research team STEP 4 Construct portfolio STEP 5 Manage and maintain portfolio Investment Team Portfolio Manager Years with Firm Years Experience Chetan Sehgal, CFA, Executive Vice President / Director of Global Emerging Markets / Small Cap 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%. 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). 19. Risk is measured by the annualized standard deviation of monthly total returns. Performance of the fund does not include sales charges (if applicable), but it does include dividends and capital gains reinvested at net asset value. 20. 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. franklintempleton.com 5

6 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. 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 returns vary from the average of its previous returns. The larger the standard deviation, the greater the likelihood (and risk) that performance will fluctuate from the average return. Tracking Error: Measure of the deviation of the return of a product compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment 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, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Small cap company stocks have historically had more price volatility than large-company stocks, particularly over the short term. All investments in the fund should be thought of as long-term investments that could experience significant price volatility in any given year. The fund is designed for the aggressive portion of a well-diversified portfolio. These and other risk considerations are discussed in the fund s 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. Source: Morningstar, 03/31/2018. For each mutual fund and exchange traded fund with at least a 3-year history, Morningstar calculates a Morningstar Rating based on how a fund ranks on a Morningstar Risk-Adjusted Return measure against other funds in the same category. This measure takes into account variations in a fund s monthly performance, and does not take into account the effects of sales charges, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The weights are: 100% 3-year rating for months of total returns, 60% 5-year rating/40% 3- year rating for months of total returns, and 50% 10-year rating/30% 5-year rating/20% 3-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent 3-year period actually has the greatest impact because it is included in all three rating periods. The Fund s Advisor Class shares received a Morningstar Rating of 3, 4 and 4 star(s) for the 3-, 5- and 10-year periods, respectively. Morningstar Rating is for the named share class only; other classes may have different performance characteristics. Past performance is not an indicator or a guarantee of future performance. Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2018 Franklin Templeton Investments. All rights reserved. 626 PP 03/18