Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

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2 Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. Sir John Templeton, Templeton Funds Founder and Former Chairman

3 The pullback of the stock market in 2008 left a lasting impression on many investors. The result: a hangover of anxiety about investing in equities and trillions of dollars sitting in low-yielding savings instruments. 1 It s time to take stock of the current situation facing investors, the human behavior that helped land us here and how investors can rebuild their portfolios to reach their long-term goals. 1] The Investor s Dilemma See why investors today face a difficult dilemma at current yields, their investments in many traditional fixed income vehicles are essentially at a standstill, while their long-term investment goals continue to require capital growth. 2] How We Got Here Learn about the instinctive behaviors that impact how we make decisions. Having a greater understanding of these behaviors may help you make better decisions when it comes to investing. 3] What Most Investors Are Missing While it may feel like the economy is still struggling, there are many positive developments that may surprise you. 4] Taking the Next Step Review simple strategies for getting back into the stock market, at your own pace, with your financial advisor and Franklin Templeton funds. 1. Source: Money Market Accounts and CDs (Time Deposits at FDIC-insured commercial banks & savings institutions): FDIC. As of 9/30/12 (most recent data available). Time to Take Stock 1

4 1] The Investor s Dilemma Market volatility may have led many investors to flee the stock market into fixed income investments, such as money market accounts, CDs and government bonds. The historically low interest rates on these instruments, along with increased demand, has helped drive down yields. For investors, this means their investments may essentially be at a standstill, but their goals buying a home, secure financial future, retirement and so on may still require capital growth. The $10,000 Truth As of December 31, 2012, if you invested $10,000 in a money market account, a 1-year CD or 10-year Treasuries for one year, you would earn enough to buy the items in the chart below. Factor in inflation and taxes and these meager yields look even worse. After One Year, a $10,000 Investment Would Equal 2 Yields as of December 31, % 0.03% 0.13% Money Market Accounts 1-Year CDs 10-Year Treasuries This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund. Past performance does not guarantee future results. It s important to note that money market accounts and CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 and CDs offer a fixed rate of return. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed. Fund investment returns and share prices will fluctuate with market conditions, and investors may have a gain or a loss when they sell their shares. 2. Sources: Money Market Accounts and 1-Year CDs: BanxQuote BanxCorp. All rights reserved. BanxQuote is a registered trademark and servicemark of BanxCorp; 10-Year Treasuries: The Federal Reserve H.15 Report. 2 Time to Take Stock

5 2] How We Got Here We re Only Human The field of behavioral finance examines the psychological and behavioral variables that can come into play with investing. As humans, our decisions can be influenced by emotions, biases and assumptions, especially when it comes to money. Recognizing you may be subject to these factors may help you make better investment decisions. Availability Bias Our thinking is greatly influenced by what is personally most relevant, recent or dramatic. And little has been more dramatic than the unprecedented events of the 2008 financial crisis that continues to be at the forefront of investors minds. Pessimism Continues to Guide Many Investor s Decisions With the proliferation of bad news over recent years, investors around the world are still feeling the pain, as shown in the example below of outflows from equity funds in the U.S. Net Flows into Equity Funds $635 Million -$23 Billion The investor s chief problem and even his worst enemy is likely to be himself. Benjamin Graham -$83 Billion -$128 Billion -$228 Billion 3. Source: Investment Company Institute, Washington, DC Time to Take Stock 3

6 Investors Have Mixed Feelings About the Market The 2013 Franklin Templeton Investor Sentiment Survey shows more investor optimism and a clearer perception of how recent markets have actually performed. However, 69% of those surveyed plan to be more conservative or make no changes to their investments in Some investors may have a hard time embracing a long-term investing strategy that includes equities. Perception What Investors Believe Can Happen Percentage Of Global Investors Who Said They Can Meet Goals Without Investing In Stocks 70% 4 Latin America 64% Europe 47% U.S. & Canada Reality How the Market Performed Market changes have always been a part of equity investing. With the events in recent years, it s understandable that more than 50% of surveyed investors believed the market was down or flat in But was it? As shown in the chart below, while stocks experienced a severe downturn in 2008, the next three years were positive for the U.S. and two out of three years were positive for Asia and Europe, indicating a misperception about the stock market s performance. MSCI Europe Index, MSCI AC Asia Ex Japan Index & S&P 500 Index 5 80% 60% 40% 20% 0% -20% -40% -60% MSCI Europe Index MSCI AC Asia Ex Japan Index S&P 500 Index The Franklin Templeton Global Investor Sentiment Survey, conducted by ORC International, included responses from 9,518 individuals in 19 countries: Brazil, Chile and Mexico in Latin America; Australia, China, Hong Kong, India, Japan, Malaysia, South Korea and Singapore in Asia Pacific; France, Germany, Italy, Poland, Spain and the UK in Europe, and the United States and Canada in North America. Survey respondents were between the ages of 25 and 65 in Latin America and Asia Pacific and 25 and older in Europe and North America. Respondents were required to own investable assets, such as stocks, bonds, mutual funds, etc. In addition, a minimum investable asset threshold was set for each country to ensure that the respondent had sufficient investments, providing a knowledge base from which to answer the survey questions. Surveys were completed from January 14 to 25, 2013, in all countries. 5. Source: 2013 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities financial products. This report is not approved, reviewed or produced by MSCI. Source: S&P Copyright 2013, S&P Dow Jones Indices LLC. All rights reserve. Index performance displayed in EUR, as of December 31, Time to Take Stock

7 Loss Aversion Studies have shown that the pain of a loss is much stronger than the reward felt from a gain. In fact, the desire to avoid market losses has caused many investors to move their money out of stocks and into low-yielding fixed income vehicles, trading potential market losses for potential negative real returns once the impact of inflation is factored in. PERCEIVED SAFETY MAY COME AT A COST As investors, we may make financial decisions to avoid the pain of loss. Investors reluctance to get back into the stock market is evidence of this behavior. However, this perceived safety may come at a cost. The chart below shows the average money market account yield over the past 10 years along with the inflation-adjusted yield. Although some investors may consider money market accounts as a more secure investment option while they wait out stock market volatility, they may not be aware of the potential erosion of their purchasing power. Money Market Accounts Average Yield Before and After Inflation 6 10-Year Period Ended December 31, % 0% 0.03% -2% -1.64% Inflation-Adjusted -4% This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund. The Big Bite of Inflation. If you held your money in cash, it would only take 24 years to cut its purchasing power in half (based on the 30-year average inflation rate as of December 31, 2012). 7 It s important to note that money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250, Sources: BanxQuote BanxCorp. All rights reserved. BanxQuote is a registered trademark and servicemark of BanxCorp. Inflation: U.S. Bureau of Labor Statistics. Inflation is represented by year-over-year changes of the Consumer Price Index (CPI) plotted on a monthly basis. 7. Source: U.S. Bureau of Labor Statistics. Based on the 30-year average inflation rate of 2.89% as represented by the Consumer Price Index (CPI) as of December 31, Time to Take Stock 5

8 Herding As social animals, it s not easy to stand behind an opinion that differs from the majority. We are programmed to follow the crowd and tend to assume the consensus view to be correct. Unfortunately, when it comes to investing, herd mentality may significantly impact long-term results. The Problem of Going with the Flow In the chart below, the orange line represents performance of the S&P 500 since December 31, 1990 and the green shading represents flows into equity funds. When the S&P 500 performed well, there was an influx of money to equity funds (buying high) and when the market pulled back, investors withdrew their money from equities (selling low) and rushed into bond funds. Investors Following the Herd Historically Bought High and Sold Low S&P 500 Performance vs. Equity and Bond Fund Net New Flows 8 S&P 500 BUYING HIGH Equity & Bond Fund Flows $60,000 $40,000 S&P 500 Performance Equity Fund Flows Bond Fund Flows $375 Billion $250 Billion $20,000 $125 Billion $10,000 Investment $0 -$20,000 -$125 Billion SELLING LOW -$40,000 12/ /2012 -$250 Billion This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund. Past performance does not guarantee future results. 8. Sources: S&P 500: 2013 Morningstar; Equity and Bond Fund Flows: ICI. Flows are represented by monthly 12-month net new cash flows. Indexes are unmanaged and one cannot invest directly in an index. 6 Time to Take Stock

9 Investor Returns Have Been Significantly Lower Than Market Returns Herd-like behavior may have caused many investors to pull their money out of equities at the wrong time and miss some of the best days in the market. This may help explain why the 20-year average annual return of the S&P 500 for the period ended December 31, 2011, was higher than the average equity investor s return. Investor Returns vs. Market Returns 20-Year Period Ended December 31, % To buy when others are despondently 3.5% selling and to sell when others are Average Equity Investor s Annualized Return S&P 500 Index buying requires the greatest fortitude and pays the greatest ultimate rewards. This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund. Past performance does not guarantee future results. sir john templeton 9. Source: Dalbar Inc., Quantitative Analysis of Investor Behavior, March 2012 (most recent data available). Indexes are unmanaged and one cannot invest directly in an index. Time to Take Stock 7

10 3] What Most Investors Are Missing... Even if it looks as if there are only economic problems, there are many positive developments worldwide that may surprise you....about THE GLOBAL ECONOMY Globalization & Cross-Border Investments Cross-Border Investments Have Grown Substantially Since NORTH AMERICA LATIN AMERICA WESTERN EUROPE MIDDLE EAST, AFRICA & REST OF WORLD RUSSIA & EASTERN EUROPE 29.0 OTHER ASIA AUSTRALIA & NEW ZEALAND 26.8 JAPAN 4.0 World GDP, 2009 = US$58 trillion 0.5 1% ($ ) 1 3% ($ ) 3 5% ($ ) 5 10% ($ ) 10%+ ($5.8+) Global Consumption Is Increasing China s Monthly Car Sales Outpace Those of the U.S MILLION 1.6 MILLION The World s Middle Class Is Projected to Reach 5.1 Billion by the Year Includes total value of cross-border investments in equity and debt securities, lending and deposits, and foreign direct investments. Figures inside bubbles are regional financial stock. Lines between regions show total cross-border investments. Source: International Monetary Fund, McKinsey Global Institute analysis. McKinsey Global Institute, Mapping Global Capital markets Update, Sources: China Automotive Information Net and Bloomberg, as of September 30, Based on the six-month rolling average. 12. Sources: United Nations, World Bank, Surjit S. Bhalla, Second Among Equals: The Middle Class Kingdoms of India and China, May 2007 and oxusinvestments.com. 8 Time to Take Stock

11 ...ABOUT THE GLOBAL ECONOMY A Simple But Powerful Relationship GLOBALIZATION URBANIZATION Advanced Economies & Emerging Markets Will Grow from 44% in 2012 to 50% in 2030 LIFESTYLE CHANGES & REPLACEMENT DEMAND Commodity Demand Large Infrastructure Projects Public Housing, Works Increase Transport Lines Sufficient Food Consumerism Rising Wages Higher Spending Power Demand for Luxury Goods...ABOUT STOCKS Corporate Cash Near All-Time High S&P 500 Companies Total Cash as a Percentage of Total Assets 13 12% 13.19% 1Q % 9.70% Average Stocks Have Offered Attractive Dividend Yields 14 4% 0% % 0.02% MSCI AC WORLD INDEX AVERAGE YIELD MONEY MARKET ACCOUNT YIELD 13. Source: Ned Davis Research Group, Inc. Based on historical data since The historical average cash level for 3/3/77-3/31/13 was 9.70%. 14. Source: 2013 FactSet Research Systems Inc. All Rights Reserved. The information contained herein: (1) is proprietary to FactSet Research Systems Inc. and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither FactSet Research Systems Inc. nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI. Indexes are unmanaged, and one cannot invest directly in an index. All data as of December Time to Take Stock 9

12 4] Taking the Next Step Volatility has kept many investors on the sidelines in low-yielding investments. While playing it safe may make sense for investors with short time horizons, this approach leaves long-term investors at risk of not achieving their investment goals. Armed with the knowledge that we make decisions based on emotion, and that there are many positive signs that point to a potentially bright future for equities, now may be a good time to talk to your financial advisor about stepping back into the stock market. Strategies to Re-Enter the Stock Market Step Earn Income. While you maintain your position in fixed income funds, work with your financial advisor to diversify a portion of your money into balanced funds (funds that invest in both stocks and bonds) that pays monthly income. All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investing in dividend-paying stocks involves risks. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease or totally eliminate their dividends without notice. A fund s investment return and principal value will fluctuate with market conditions, and it is possible to lose money. These and other risk considerations are discussed in the current prospectus and where available the relevant Key Investor Information Document. 10 Time to Take Stock

13 WALK Build a Position. Move more confidently and develop a plan with your financial advisor to systematically move your money off the sidelines and back into equity funds. By building an equity position using periodic investments, you may be able to buy more at market dips and less at market peaks. Periodic investing plans do not assure a profit and do not protect against a loss in a declining market. SPRINT Capitalize on Opportunity. If you re ready to take advantage of potential opportunities and move back into the stock market before the rest of the herd, now may be an opportune time. Talk to your financial advisor about a strategy that makes sense based on your investment goals. No matter how you choose to get back into the stock market stepping, walking or sprinting Franklin Templeton Investments has the funds to get you started. Time to Take Stock 11

14 Gain From Our Perspective Franklin Templeton Investments distinct multi-manager structure combines the specialized expertise of three world-class investment management groups Franklin, Templeton and Mutual Series. Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry s oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. 12 Time to Take Stock

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16 Franklin Templeton Investments Offshore 100 Fountain Parkway St. Petersburg, FL Important Information This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any of the Franklin Templeton Luxembourg-domiciled SICAVs. Nothing in this document should be construed as investment advice. Franklin Templeton Investments has exercised professional care and diligence in the collection of information in this document. However, data from third party sources may have been used in its preparation and Franklin Templeton Investments has not independently verified, validated or audited such data. Reproduction of the S&P Index Data in any form is prohibited except with the prior written permission of S&P. S&P does not guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions, regardless of the cause or for the results obtained from the use of such information. S&P DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall S&P be liable for any direct, indirect, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with subscriber s or others use of the S&P Index Data. Opinions expressed are the author s at publication date and they are subject to change without prior notice. Any research and analysis contained in this document has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. References to indices are made for comparative purposes only and are provided to represent the investment environment existing during the time periods shown. An index is unmanaged and one cannot invest directly in an index. The performance of the index does not include the deduction of expenses and does not represent the performance of any Franklin Templeton fund. Franklin Templeton Investments shall not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission. In the U.S., this publication is made available to you for informational purposes only by Templeton/Franklin Investment Services, Inc. 100 Fountain Parkway, St. Petersburg, Florida Tel: (800) (USA Toll-Free), (877) (Canada Toll-Free), and Fax: (727) Investments are not FDIC insured; may lose value; and are not bank guaranteed. Distribution outside the U.S. may be made by Templeton Global Advisors Limited or other sub-distributors, intermediaries, dealers or professional investors that have been engaged by Templeton Global Advisors Limited to distribute shares of Franklin Templeton funds in certain jurisdictions. This is not an offer to sell or a solicitation of an offer to purchase securities in any jurisdiction where it would be illegal to do so Franklin Templeton Investments. All rights reserved. TSOA B 05/13