Templeton Foreign Fund Advisor Class

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1 Templeton Foreign Fund Advisor Class Value Equity Product Profile Product Details 1 Fund Assets $6,929,356, Fund Inception Date 10/05/1982 Number of Issuers 87 NASDAQ Symbol TFFAX Maximum Sales Charge 0.00 Investment Style Benchmark Lipper Classification Morningstar Category Dividend Frequency Asset Allocation 2 EQUITY Value MSCI All Country World ex-us Index International Multi-Cap Value Foreign Large Value Annually in December Fund Description The fund seeks long-term capital growth by investing at least 80% of its net assets in foreign securities, that are predominantly equity securities of companies located outside of the U.S., including developing markets. Performance Data 3,4 Average Annual Total Returns 5 (%) Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs (10/05/1982) Advisor Class MSCI All Country World ex-us Index 20% 10% 0% -10% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception CASH & CASH EQUIVALENTS 2.58 Advisor Class MSCI All Country World ex-us Index 0% 50% 100% 150% Total Annual Operating Expenses With Waiver:0.85% Without Waiver: 0.94% 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 an expense reduction contractually guaranteed through 12/31/2019. Fund investment results reflect the expense reduction; without this reduction, the results would have been lower. Calendar Year Returns (%) Advisor Class MSCI All Country World ex-us 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 Despite strong January performance, global equity markets generally shed value in US-dollar terms for the first quarter of Concerns arose that strong economic growth and rising inflation in some parts of the world, particularly the United States, would lead central banks to increase interest rates sooner than expected. A selloff in technology firms amid worries about consumer data privacy and potentially tighter regulatory controls in the sector affected many developed markets. Sentiment was also dampened by fears that a trade war could develop following protectionist moves by the Trump administration. Frontier- and emerging-market stocks, as measured by MSCI indexes, advanced and outperformed global equities as a group, along with their developed-market peers, which generally declined. Latin American bourses collectively surged for the first quarter, mainly on the strength displayed in January due to a rise in appetite for risk assets and optimism about certain economies in the region. Brazil s gross domestic product (GDP) rose year-on-year in the fourth quarter and for 2017 overall after declining in 2015 and Although Mexico revised down its fourth-quarter GDP growth to the slowest pace since 2013, the country s economy grew quarter-on-quarter, with its strongest expansion in four quarters. In Asian emerging markets, China s preliminary GDP growth figure for 2017 beat consensus expectations and the country s target. South Korea s fourth-quarter GDP grew year-on-year but declined quarter-on-quarter. The US economy expanded at slightly slower pace in the fourth quarter of 2017 than in the third quarter. At its March 2018 monetary policy meeting, the US Federal Reserve raised its benchmark interest rate. It also lifted its 2018 US growth forecast but maintained its projection of three rate hikes this year. Europe s 2017 GDP grew strongly in both the euro area and in the European Union (EU) overall. The February 2018 unemployment rate in the euro area edged down to the lowest reading since December 2008, and the rate in the EU declined to the lowest level since September The United Kingdom s 2017 GDP grew at the weakest annual growth pace since Elsewhere, Japan s revised fourth-quarter GDP marked the eighth consecutive quarter of growth and the longest period of expansion since Performance Review The fund underperformed its benchmark index for the first quarter. At the end of last year, we cautioned that risks appear elevated at this point in the cycle as policymakers begin raising rates against a backdrop of high asset prices and historically low volatility. The idea that policy tightening, geopolitical tensions and inflationary pressures could mark an inflection point in the cycle is a theme we have discussed at length. Within the portfolio, we have been preparing for this transition by reducing exposure to fully valued market leaders and reinvesting in what we view as undervalued market laggards. While we believe the portfolio was reasonably well-positioned for enhanced volatility and risk aversion, stock-specific weakness detracted in the first quarter. Sector Analysis Our results in the industrials sector was pressured by a stake in UK-based distributor of specialty building products SIG. More generally, we are finding select opportunities in the sector, particularly among companies benefiting from restructuring or exposure to end markets with better growth prospects, such as aerospace/defense and industrial automation. We have avoided expensive companies that fail to reflect the maturity of their business cycles or that reflect excessive optimism with regard to sustainable growth rates and returns. Stock selection in the materials sector also weighed on relative results. Leading detractors within the sector included Canadian gold miner Alamos Gold and precious metals streaming firm Wheaton Precious Metals, along with Japanese cement company Taiheiyo Cement. In the information technology sector, shares of China-based online gaming publisher NetEase declined in value and pared relative results. While we think many of the consumer and internet technology stocks that have led the market recently trade at prohibitively expensive valuations and appear vulnerable to a correction at this point in the cycle, we have found sufficient value elsewhere in the sector to justify a moderate absolute allocation. Ultimately, we recognize that technology is a sector defined by innovation and disruption, and our approach is to identify both mature companies with the ability to adapt to change, as well as new entrants likely to emerge as winners. Many such opportunities have emerged over recent years in mature software companies developing new revenue models and businesses in fast-growing segments like cloud computing. The market was slow to catch on in many cases, valuing these companies as low-multiple, ex-growth legacy businesses. But seeing is believing, and a string of above-consensus earnings results and profit upgrades driven by the success of the new operating segments has underpinned a re-rating in many stocks. Elsewhere in the sector, select opportunities arose among semiconductor manufacturers excessively pressured by supply concerns and hardware companies whose lackluster growth prospects obscured restructuring and margin expansion potential. While these types of stocks never obtained the multiples of leading internet technology stocks, they have become more expensive and many are now closing in on fair value, in our analysis. We believe a number of our tech holdings still have reasonable upside potential, though true bargains have become increasingly scarce in the sector. Turning to contributors, stock selection and an underweight in the consumer staples sector contributed to relative performance. Shares of Japanese beverage-maker Suntory Beverage & Food rallied on expectations that a robust new product pipeline would help the firm outpace rivals profit and volume growth. While the stock has partially re-rated, we believe the market has continued to underestimate Suntory s earnings potential in Japan as the company cuts costs and reduces promotional activity. The company s Southeast Asian operations also look poised to improve after the firm switched distributors in Thailand and Indonesia. Suntory continued to trade at a discount to its global peers, and should be able to narrow the valuation gap as anticipated improvements come to fruition. From the utilities sector, shares of German renewable energy firm innogy rallied after a rival utility bid for the firm in a deal that would restructure Germany s energy industry and establish a national champion to cope with ongoing sector reforms. The firm disappointed investors a few months ago after its need for further investment to achieve longer-term growth objectives led to a profit warning. The company s chief executive officer was dismissed and some confusion over the direction of the company ensued, leaving innogy more vulnerable to a takeover. While the bid is slightly lower than we had hoped, we think the deal makes sense as innogy and its suitor have been following similar strategies in recent years, including a focus on transmission and distribution grids, renewable energy development, and power and gas retail. Stock selection in the financials sector further lifted relative performance. Top contributors within the sector included Netherlands-based liquidity provider Flow Traders and insurer Aegon. Country Analysis franklintempleton.com 2

3 Regionally, stock selection in Asia, particularly in China, dampened relative performance. Stock selection in Europe also detracted from relative results. Conversely, positioning in the Netherlands and Germany, along with a lack of exposure to Australia, enhanced relative performance. Portfolio Positioning On average, the fund was overweight compared to the benchmark in the health care, energy and telecommunication services sectors in the first quarter. It was most underweight relative to the benchmark in the consumer staples, consumer discretionary and industrials sectors, with no exposure to the real estate sector. Outlook & Strategy Surveying the current global investment environment, a number of situations appear incongruous and unsustainable to us. First, the US-led economic cycle is now the second-longest of the post-war era, with the world s largest economy nearing full employment and peak profitability. This strikes us as an odd moment to unleash large-scale fiscal stimulus, especially if it needs to be deficit-financed at a time of waning demand for Treasury debt. Second, US stocks are near their highest valuation levels in history, at least based on the metrics that are most correlated to future long-term returns. This seems a strange time to rush indiscriminately into US equities, yet data confirms that 2017 saw record inflows into US-focused exchange-traded funds. Third, corporate debt-to-gdp is back near previous peaks, while the government debt-to-gdp ratio of the Group of Seven countries is near the highest level since World War II. This seems a perilous time to increase borrowing costs, but nevertheless rates have been rising. Our broader point is that risks appear elevated at this mature stage in the cycle, with volatility resurfacing in an environment of full valuations, rising interest rates and still fragile economic growth. We would not want to own the leaders of the last cycle in this environment, and believe that the inevitable market transition come when it may could significantly bolster the case for active value investing. In keeping with our time-tested value discipline, recent quarters have seen us reducing exposure to expensive sectors like internet technology, consumer discretionary and US banks and reinvesting proceeds into beleaguered sectors like health care, telecommunications and select energy stocks. The aim of a long-term, contrarian investment framework is to spot such opportunities and get there before the crowds arrive to erode the return potential. In this environment of impending transition, we have continued to find what we consider the best long-term opportunities among unloved and overlooked stocks. 6. The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager s assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund s portfolio selection process. Holdings are subject to change. Portfolio Characteristics 7,8,9 Portfolio MSCI All Country World ex-us Index Price to Earnings (12 Month Trailing) 13.83x 15.64x Price to Book Value 1.31x 1.67x Price to Cash Flow 6.45x 9.10x Market Capitalization (Millions in USD) 64,053 64,869 Portfolio Diversification Top Ten Holdings 10 Top Holdings Sector Country % SAMSUNG ELECTRONICS CO LTD Technology Hardware & Equipment South Korea 3.59 BP PLC Energy United Kingdom 2.81 ROYAL DUTCH SHELL PLC Energy United Kingdom 2.56 STANDARD CHARTERED PLC Banks United Kingdom 2.37 AEGON NV Insurance Netherlands 2.23 SOFTBANK GROUP CORP Telecommunication Services Japan 2.18 WHEATON PRECIOUS METALS Materials Canada 2.15 CORP ROCHE HOLDING AG Pharmaceuticals, Biotechnology & Life Switzerland 2.04 Sciences BNP PARIBAS SA Banks France 1.97 TEVA PHARMACEUTICAL Pharmaceuticals, Biotechnology & Life Israel 1.94 INDUSTRIES LTD Sciences 7. 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. MSCI All Country World ex-us Index 11,12 EUROPE ASIA NORTH AMERICA MID-EAST/AFRICA CASH & CASH EQUIVALENTS % 25% 50% 75% Sector Weightings vs. MSCI All Country World ex-us Index 13,14 Financials Health Care Energy Information Technology Industrials Materials Telecommunication Services Consumer Discretionary Consumer Staples Utilities Real Estate Cash & Cash Equivalents % 5% 10% 15% 20% 25% 30% Templeton Foreign Fund MSCI All Country World ex-us Index Templeton Foreign Fund MSCI All Country World ex-us Index Largest Sector Contributors vs. MSCI All Country World ex-us Index 15 Total Sector Effect (%) Consumer Staples 0.37 Utilities 0.14 Financials 0.09 Energy 0.04 Real Estate 0.01 Contributors/detractors data shown is for the period from 01/01/2018 to 03/31/2018. Largest Sector Detractors vs. MSCI All Country World ex-us Index 16 Total Sector Effect (%) Industrials Materials Information Technology Consumer Discretionary 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. Investment Philosophy Templeton utilizes a disciplined, consistent approach based on three timeless principles of investing: Value Patience Bottom-up stock picking Our flexible approach is applied within a disciplined framework and seeks to identify companies trading at large discounts to their business value. Our long-term focus gives us a framework to take advantage of price volatility to reveal potential longterm investment opportunities. Patience allows for potential long-term value recognition. Our portfolio management process seeks to buy pessimism and sell optimism. We build portfolios spanning regions and sectors made up of securities identified through this process. Investment Process Identify Potential Bargains Experienced analysts Focus on global industry sectors Quantitative and qualitative assessment Identify material ESG issues In-Depth Fundamental Analysis Five-year financial forecasts Management/supplier/ competitive evaluation Upside/downside return quantification Recommendation of Bargain List candidates Research Team Evaluation Presentation of investment thesis Investment debate and critique: Devil s Advocate ESG Devil s Advocate Director of research approval Bottom-Up Portfolio Construction Investment parameters Industry and sector framework Build and diversify portfolio Long-term approach: 20% historical turnover TEMPLETON S BOTTOM-UP STOCK SELECTION PROCESS Portfolio Monitoring and Risk Management Ongoing valuation analysis Ongoing ESG monitoring Disciplined sell methodology Weekly peer review and risk analytics 19. Historical turnover is based on Templeton s experience as a Firm, over a five-year period as of most recent quarter end. The turnover is a byproduct of Templeton s long-term approach to managing portfolios, but various factors, such as a portfolio s specific investment guidelines and market or economic conditions may cause actual portfolio turnover to vary. Investment Team Portfolio Manager Years with Firm Years Experience Tucker Scott, CFA, EVP, Portfolio Manager, Research Analyst Norman Boersma, CFA, Chief Investment Officer James Harper, CFA, EVP, Portfolio Manager, Research Analyst Heather Arnold, CFA, EVP, Director of Research, Portfolio Manager, Research Analyst Christopher James Peel, CFA, SVP, Portfolio Manager, Research Analyst Herbert J Arnett Jr., SVP, Portfolio Manager, Research Analyst Additional Resources Investment Risk Management Group Global Portfolio Compliance Global Research Library Global Trading Platform Junior Research Analysts Research Technology Group 17. Beta, Information Ratio and Tracking Error information are measured against the MSCI All Country World ex-us Index. 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 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. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in developing markets involve heightened risks related to the same factors. Currency rates may fluctuate significantly over short periods of time, and can reduce returns. 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. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio which may result in significant volatility and cause the fund to participate in losses (as well as enable gains) on an amount that exceeds the fund s initial investment. The fund may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as promised. The fund s risk considerations are discussed in the prospectus. Important Legal Information Investors should carefully consider a fund s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/ or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at: 3. Effective 01/02/1997, the fund began offering Advisor Class Shares. For periods prior to the fund s Advisor Class inception date, a restated figure is used based on the fund s oldest share class, Class A performance, excluding the effect of Class A s maximum initial sales charge but reflecting the effect of the Class A Rule 12b-1 fees; and b) for periods after the fund s Advisor Class inception date, actual Advisor Class performance is used, reflecting all charges and fees applicable to that class. Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2018 Franklin Templeton Investments. All rights reserved. 604 PP 03/18