Franklin Mutual Beacon Fund Class Z

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1 Value Equity Product Profile Product Details 1 Fund Assets $3,849,216, Fund Inception Date 06/29/1962 Number of Issuers 58 NASDAQ Symbol Maximum Initial Sales Charge Investment Style Benchmark Lipper Classification Morningstar Category Dividend Frequency Asset Allocation 2 EQUITY BEGRX Value Global Multi-Cap Value Allocation 85%+ Equity Semiannually in September and December Fund Description The fund seeks capital appreciation with income as a secondary goal. The fund focuses mainly on undervalued mid- and large-cap equity securities with a significant portion of its assets in foreign securities and, to a lesser extent, distressed securities and merger arbitrage. Performance Data 3,4 Average Annual Total Returns 5 (%) 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception (06/29/1962) Class Z % 10% 0% -10% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception CASH & CASH EQUIVALENTS 2.96 Class Z FIXED INCOME % 25% 50% 75% 100% 125% Total Annual Operating Expenses: 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. Class Z shares are only offered 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 (%) Class Z Portfolio Manager Insight 6 Market Review The (in US dollar terms) declined in the first quarter as volatility returned to global financial markets. A synchronized upswing in global economic growth, positive corporate earnings news and the anticipated benefit of major US tax reform legislation for US companies contributed to a solid start for equities in January. However, stocks tumbled in early February. Negative factors included higher bond yields, potential signs of increasing inflation pressures and likely interest rate hikes, primarily in the United States. A spike in US equity market volatility added to investor anxiety. 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. 3,4. 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 Global equity markets dropped again in March. Fear of escalating tariffs imposed by the United States and its trade partners, particularly China, was the biggest reason. Concern regarding consumer data privacy and potentially tighter regulatory controls of information technology companies also hurt stocks. Global economic data was generally upbeat during the period. Labor market conditions continued to improve in the United States, Europe and Japan. Business surveys continued to show a brisk pace of economic activity, although the eurozone composite purchasing managers index, which combines the manufacturing and services sectors, slipped in February and March. The March releases of industrial production, capital spending and retail sales data for China were largely positive. The Federal Reserve s (Fed s) Federal Open Market Committee raised interest rates in March, as widely expected. However, the Fed s Summary of Economic Projections report released in March showed expectations of lower unemployment and faster economic growth, as well as a potentially greater number of interest rate hikes by 2020 than anticipated in the December report. In March, the European Central Bank (ECB) dropped its explicit pledge to expand its bond-buying program if financial conditions worsened or inflation declined. In addition, some ECB officials discussed the possibility of an interest hike in Performance Review During the quarter, the fund s largest detractors from absolute performance included Vodafone Group, Royal KPN and General Electric. Vodafone Group is a UK-based global mobile telecommunications company. In February, investors were disappointed by slower quarterly growth in overall service revenues, a decline in service revenues in India, and management comments on higher spending for wireless spectrum. In our view, the negative news was not as severe as the investor reaction implied. Later in the month, Vodafone confirmed that it was in talks with media company Liberty Global (not a fund holding) to acquire cable assets in Europe. Investors were concerned that Vodafone may overpay for the assets, causing it to issue equity. Beyond the concerns regarding the possible purchase price for Liberty Global s cable assets, we believe Vodafone is doing a good job of lowering costs, improving revenues and focusing on areas of the business with higher profit margins, which includes divesting non-core assets. Multiple factors hurt shares of KPN during the period. Quarterly earnings reported in January were in line with expectations, but the outlook for another year of flat earnings in 2018 was disappointing. In February, the Dutch telecommunications regulator (ACM) proposed new regulations for cable operators. The proposal would not change the current regulatory framework for KPN, but it could reduce wholesale revenues. However, we continue to have a favorable view on KPN shares. Free cash flow growth remains strong, and we are beginning to see a recovery in the business-to-business segment, which has been a drag on revenues and earnings. Although the ACM s proposal is disappointing, the European Union has rejected prior calls by the ACM for cable regulation and the impact of the proposals would be modest if eventually passed. Shares of General Electric, a US-based industrials company with a wide range of businesses, dropped in January. GE announced a $6.2 billion after-tax charge related to its insurance subsidiary at GE Capital. Management warned investors last year of a potential charge, but the total was greater than expected. At the same time, chief executive officer John Flannery stated that management is looking aggressively at ways to maximize the value of its power, aviation and healthcare businesses. Despite a string of negative events that began in 2017, we believe management s move to affirm its 2018 outlook in January and its latest quarterly results indicate GE may be starting to deliver on its plan to improve free-cash flow and lower expenses. In contrast, the fund s three leading contributors were Sky, Cognizant Technology Solutions and Nokia. In late February, shares of Sky, a UK pay-tv provider, jumped when US-based cable company Comcast made a surprise bid for the company. The Comcast bid was considerably higher than that of 21st Century Fox (not a fund holding), which has been in the process of acquiring the 61% of Sky it does not own, but has been stuck in a more arduous regulatory review process than anticipated. The Comcast bid could spark a bidding war. The Walt Disney Company, which is attempting to purchase 21st Century Fox, views Sky as an important asset. Many investors believe a combined Disney and Fox could make a counter-offer if Fox receives regulatory approval by the UK government to acquire Sky. If Fox is unable to secure regulatory approval, Disney may be willing to bid for Sky separately. Cognizant Technology Solutions is a US-based information technology services company with a significant percentage of its workforce in India. Cognizant s fiscal fourth-quarter results, announced in February, showed solid growth in revenues and profitability for the full year. The latest results and management s 2018 outlook provided confidence that it is on track to achieve its margin goals. We believe the company s high exposure to the banking and health care industries and its focus on digital technologies place it in a solid position to keep growing. In addition, Cognizant is following through on its plan to return $3.4 billion to shareholders. In February, it announced another accelerated share repurchase, this time for $300 million. Nokia, a Finland-based global communications and information technology company, announced solid quarterly and full-year results in February, particularly better-than-expected profits for 2017 and significant improvement in cash flow. Management also issued a new earnings target for 2020 that was higher than many investors had anticipated. The positive news alleviated lingering investor concerns from last year regarding increased cash costs associated with replacing legacy Alcatel equipment (Nokia acquired Alcatel in 2016), the related steep decline in cash on its balance sheet and weaker equipment sales. Portfolio Positioning At quarter-end, the fund s investment in equities was 87.7% while the level of cash and cash equivalents was approximately 2.9%. In addition, 72.8% of foreign securities exposure was hedged back to the US dollar at quarter-end. We initiated a position in a global travel retailer that operates duty-free shops. The stock s risk/reward profile became increasingly attractive following a recent decline in the stock price. We exited our position in KLX, a USbased company that provides logistics support to aerospace and oil and gas firms. The stock price moved above our estimate of fair value as operating performance continued to improve and management continued to pursue strategic alternatives, including an outright sale of the company or the sale of operating divisions. Compared to the benchmark, the fund s most significant overweight was in the consumer discretionary sector, while the most sizable underweight was in the consumer staples sector. The fund had 6.5% of merger arbitrage exposure and 2.9% invested in distressed debt. M&A activity picked up in the early stages of 2018, although regulatory risk is likely to remain an important consideration for companies contemplating major deals. However, we believe catalysts for an increase in activity are robust and include stronger global economic growth, buoyant asset markets, low but potentially rising interest rates and the recently passed US tax reform legislation. In the past, companies have viewed instances of strong equity markets as an opportunity to take advantage of their highly valued stock to make acquisitions, or as an opportune time to fetch a good premium for shareholders by being acquired. In addition, lower corporate tax franklintempleton.com 2

3 rates and/or the ability to repatriate earnings from abroad at a reduced tax rate will provide additional capital for acquisitive companies. We remain active in exploring merger arbitrage opportunities (an investment in one or both of the companies that is constructed solely to benefit from deal completion), and are working to make sure the potential rewards outweigh the risks. Finding mispriced risk in credit markets remains difficult. Adding to the challenge of finding attractive credit investments are the decline in debt covenants (terms that restrict financial activities by the borrower or set parameters for specific financial metrics) and private equity firms involved in leveraged buyout transactions using increasingly liberal interpretations of credit agreements and bond indentures to potentially shift valuable assets beyond the reach of creditors. We have directed much of our focus on out-of-favor industries in pursuit of securities with the potential to benefit most from liquidityenhancing events, such as asset sales, the ability to issue secured debt within existing agreements, and free-cash flow that could buy time for a company to weather its financial storm. Outlook & Strategy Despite recent market volatility and escalating concerns about a trade war, general expectations among economists for US and global economic growth in 2018 remain positive. The consensus view for corporate earnings in the United States, Europe and Japan remain upbeat. In the United States, job growth continues to run at a level that economists believe will continue tightening the labor market. At the same time, the potential benefits of lower corporate taxes and the repatriation of foreign earnings could provide some additional support to US economic growth and corporate earnings in 2018, which were already expected to grow at a solid year-over-year pace. In Europe, economic growth in 2018 is expected to closely match last year, which was the strongest pace since Inflation has remained subdued in the United States and other developed markets. However, economic conditions, particularly tighter labor markets, are raising expectations of gradual increases in price levels. The prospect of healthy economic growth and rising inflation is providing the Fed with justification to move slowly away from its loose monetary policies, as affirmed by the Fed s interest rate hike in March and its forecast of three more 25 basis-point rate hikes this year. Positive economic conditions may also lead other major central banks, most notably the European Central Bank, to move slowly away from their loose monetary policies. Prior to February, the positive economic and corporate backdrop had been a dominant driver of US equity market gains. Overall equity market valuations (e.g., price-to-earnings, price-to-book or price-to-sales) were also elevated relative to most historical benchmarks. At the same time, performance among individual stocks varied widely, providing us with select opportunities. The February spike in the Chicago Board Options Exchange Volatility Index (VIX) was a useful reminder that equity markets are vulnerable to sudden pullbacks. The announcement of tariffs by the United States and counter tariffs by trading partners injected more volatility into financial markets and some uncertainty into the global economic outlook. While we do not make top-down portfolio positioning decisions, it is important to point out that successful investing can require patience and a conviction in bottom-up fundamental analysis. An essential element of value investing is confidence that its inherently contrarian nature should yield positive outcomes over time. Within the United States, our investment process has led us to a number of opportunities within the energy, financials, consumer discretionary and health care sectors. However, certain factors, including valuations coming down from historically elevated levels, the recent return of volatility and rising US interest rates, are potentially changing the attractiveness of certain sectors within the equity market, such as consumer staples. We also believe technology disruption (e.g., the rapid market share shift to online retailing and away from traditional brick-and- mortar-dominated retailers that are often labeled as value stocks) will continue to have a substantial effect on the fundamentals of those companies directly involved in this trend. Outside the United States, we continue to be optimistic about European equities, but selectivity remains crucial. While some political risk still exists in Europe (e.g., Brexit and the March 2018 election outcome in Italy), it is notably lower than a year ago. We are particularly hopeful that French President Emmanuel Macron will push through his agenda of economic reforms, which could help lower the chronically high unemployment rate, boost business and consumer spending, fuel credit growth and improve corporate profitability in France. 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 Characteristic 7,8,9 Portfolio Price to Earnings (12 Month Trailing) 14.79x 19.61x Price to Book Value 1.79x 2.31x Price to Cash Flow 6.88x 11.79x Market Capitalization (Millions in USD) 118, , 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. franklintempleton.com 3

4 Portfolio Diversification Top Ten Holdings 10 Top Holdings Sector Country % SOCIETE GENERALE SA Banks France 3.46 MEDTRONIC PLC Health Care Equipment & Services United States 3.38 SENSATA TECHNOLOGIES HOLDING Capital Goods United States 3.27 PLC GLAXOSMITHKLINE PLC Pharmaceuticals, Biotechnology & Life United Kingdom 3.23 Sciences VODAFONE GROUP PLC Telecommunication Services United Kingdom 3.22 ROYAL DUTCH SHELL PLC Energy United Kingdom 3.17 SAMSUNG ELECTRONICS CO LTD Technology Hardware & Equipment South Korea 3.16 ELI LILLY & CO Pharmaceuticals, Biotechnology & Life United States 3.09 Sciences MERCK & CO INC Pharmaceuticals, Biotechnology & Life United States 3.06 Sciences TIME WARNER INC Media United States 3.06 Geographic Weightings vs. 11,12 United States United Kingdom 6.42 France Switzerland South Korea 2.85 Netherlands 1.36 Germany Israel India China 0.26 Cash & Cash Equivalents % 25% 50% 75% Sector Weightings vs. 13,14 Consumer Discretionary Financials Health Care Information Technology Industrials Telecommunication Services Energy Consumer Staples Utilities Materials Real Estate Cash & Cash Equivalents % 5% 10% 15% 20% 25% Franklin Mutual Beacon Fund Franklin Mutual Beacon Fund 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. 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. franklintempleton.com 4

5 Largest Sector Contributors vs. 15 Total Sector Effect (%) Health Care 0.28 Utilities 0.23 Information Technology 0.21 Materials 0.21 Real Estate 0.06 Contributors/detractors data shown is for the period from 01/01/2018 to 03/31/2018. Smallest Sector Contributors vs. 16 Total Sector Effect (%) Telecommunication Services Consumer Discretionary Energy Industrials Financials 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. Investment Philosophy and Process Bottom-Up Value Approach Franklin Mutual Series Unique Value Strategy We seek to buy companies at a significant discount to their intrinsic value. We seek to understand and limit downside risk. We think and act like owners of the business. Undervalued stocks comprise the bulk of our portfolios. We search for catalysts to unlock value: Undervalued Stocks Corporate restructuring Spin-offs Share buybacks Our own initiatives Distressed Securities Merger Arbitrage 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 5

6 Investment Team Portfolio Manager Years with Firm Years Experience Christian Correa, CFA, Director of Research Mandana Hormozi, Portfolio Manager/Research Analyst Aman Gupta, CFA, Portfolio Manager/Research Analyst 8 17 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. 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. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. 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. Current political and financial uncertainty surrounding the European Union may increase market volatility and the economic risk of investing in companies in Europe. Smaller-company stocks have exhibited greater price volatility than larger-company stocks, particularly over the short term. The fund s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The fund may invest in lower-rated bonds, which entail higher credit risk. Please consult the prospectus for a more detailed description of the fund s risks. 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: Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2018 Franklin Templeton Investments. All rights reserved. 076 PP 03/18