Templeton Emerging Markets Fund

Transcription

1 AUGUST 31, 2011 ANNUAL REPORT I N T E R N AT I O N A L Templeton Emerging Markets Fund

2 Franklin Templeton Investments Gain From Our Perspective Franklin Templeton s distinct multi-manager structure combines the specialized expertise of three world-class investment management groups Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE 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. TRUE DIVERSIFICATION RELIABILITY YOU CAN TRUST Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That s why our funds can be used to build truly diversified allocation plans covering every major asset class. At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. MUTUAL FUNDS RETIREMENT PLANS 529 COLLEGE SAVINGS PLANS SEPARATE ACCOUNTS Not part of the annual report

3 Contents Annual Report Templeton Emerging Markets Fund Performance Summary Important Notice to Shareholders Financial Highlights and Statement of Investments Financial Statements Notes to Financial Statements Report of Independent Registered Public Accounting Firm Tax Designation Annual Meeting of Shareholders Dividend Reinvestment and Cash Purchase Plan Board Members and Officers.. 27 Shareholder Information Annual Report Templeton Emerging Markets Fund Your Fund s Goal and Main Investments: Templeton Emerging Markets Fund seeks long-term capital appreciation by investing, under normal market conditions, at least 80% of its net assets in emerging country equity securities. Geographic Breakdown Based on Total Net Assets as of 8/31/11 Asia Latin America & Caribbean 19.2% Europe 17.1% Middle East & Africa 0.5% Short-Term Investments & Other Net Assets 0.7% 62.5% Dear Shareholder: We are pleased to bring you Templeton Emerging Markets Fund s annual report for the fiscal year ended August 31, Economic and Market Overview Emerging market stocks started the fiscal year under review with strong performances, but turned downward as investors shifted their focus from solid equity fundamentals to social unrest in the Middle East and North Africa regions and the earthquake and tsunami in Japan. The eurozone s debt restructuring issues also remained at the forefront for a large part of the year, leading investors to remain cautious. Subsequently, U.S. debt concerns combined with independent credit rating agency Standard & Poor s downgrade of the U.S. s long-term credit rating to AA+ from AAA in early August 2011 created significant confusion and volatility in global financial markets. Global growth concerns, rising inflationary pressures and a lack of major fiscal stimulus measures also weighed on investor sentiment. Central banks in Brazil and Turkey, however, surprised investors by lowering interest rates toward period-end to support their economies. The fundamental and financial strength of emerging markets was evident during the reporting period as many emerging countries maintained lower debt-to-gross The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund s Statement of Investments (SOI). The SOI begins on page 8. Annual Report 1

4 Top 10 Countries Based on Equity Investments as of 8/31/11 % of Total Net Assets China 20.6% Brazil 17.2% Thailand 10.0% India 9.9% Indonesia 8.5% Russia 7.1% Hong Kong 5.9% South Korea 5.8% Turkey 5.8% Mexico 2.0% domestic product ratios and larger foreign reserves than many developed countries. In this environment, the MSCI Emerging Markets Index, which measures stock market performance in global emerging markets, returned +9.40% in U.S. dollar terms for the 12 months ended August 31, 2011, partly due to stronger local currencies. 1 On a regional basis, Eastern Europe was the best performing region in the reporting period, as bargain hunters searched for undervalued stocks trading at attractive valuations due to widespread panic selling rather than a deterioration of fundamentals. Resource-rich countries such as Russia and South Africa also outperformed due to higher commodity prices. Turkey, however, lagged its peers because of growth concerns and a weak lira. Higher commodity prices and stronger local currencies supported equity prices in Latin America. In Asia, with the exception of China and India, which suffered from inflationary concerns, key regional markets recorded double-digit returns in U.S. dollar terms. Investment Strategy Our investment strategy employs a fundamental, value-oriented, long-term approach. We focus on the market price of a company s securities relative to our evaluation of the company s long-term earnings, asset value and cash flow potential. As we look for investments, we focus on specific companies and undertake in-depth research to construct an action list from which we make our buy decisions. Before we make a purchase, we look at the company s potential for earnings and growth over a five-year horizon. During our analysis, we also consider the company s position in its sector, the economic framework and political environment. Performance Overview Templeton Emerging Markets Fund delivered cumulative total returns of % based on market price and % based on net asset value for the 12 months under review. Manager s Discussion During the 12-month reporting period, top contributors to the Fund s absolute performance included Brilliance China Automotive Holdings, a major Chinese 1. Source: 2011 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. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index and an index is not representative of the Fund s portfolio. 2 Annual Report

5 automobile manufacturer; Astra International, Indonesia s leading car and motorcycle company; and SK Innovation (formerly, SK Energy), a major oil refinery and service station operator in South Korea. Brilliance China has a joint venture with BMW for the production and sale of BMW 3-series and 5-series models in China. Its share price surged as the company benefited from demand growth for automobiles and government stimulus measures in the sector. Astra International s share price appreciated due to strong corporate results supported by greater domestic demand for motor vehicles and higher profits from its heavy equipment and palm oil businesses. The company benefited from Indonesia s robust economic growth, higher incomes and affordable credit. SK Innovation s share price rose due to improved refining margins as South Korea s largest oil refiner benefited from increased demand and higher product prices following the political unrest in the Middle East and North Africa, which threatened oil supply from the region, and the strongest earthquake on record in Japan, which disrupted output from the country s petrochemical plants and refineries. Consistent with our long-term investment strategy, we hold a positive outlook on the energy and consumer discretionary sectors. 2 In contrast, key detractors from absolute performance included Akbank, one of Turkey s biggest commercial banks; Sesa Goa, India s leading iron ore miner and exporter; and Victory City International Holdings, a Hong Kong-based integrated group of textile manufacturing companies with operations in Hong Kong, China, the U.S. and Canada. Shares of these companies ended the reporting period with double-digit declines. Akbank s share price suffered a setback due to narrower net interest margins, which affected the bank s net interest income. Nonetheless, we continued to consider the bank s valuations attractive and maintained a positive long-term outlook on Akbank due to its high-quality assets and relatively strong market position. Shares of Sesa Goa declined in value as a result of a possible increase in iron ore export taxes and a general correction in the Indian stock market. In our view, low valuations and high profitability could benefit Sesa Goa in the long term. Victory City was hurt by concerns of slowing growth in developed markets such as the U.S., which could subsequently impact export orders. According to our analysis, the company could have favorable prospects because it trades at what we consider an attractive valuation, has an extensive clientele and could benefit from the possibility of industry consolidation in China. Top 10 Holdings 8/31/11 Company Sector/Industry, Country % of Total Net Assets Brilliance China Automotive Holdings Ltd. 9.8% Automobiles, China Vale SA 6.3% Metals & Mining, Brazil Petrobras (Petroleo Brasileiro SA) 4.5% Oil, Gas & Consumable Fuels, Brazil PT Astra International Tbk 4.4% Automobiles, Indonesia Akbank TAS 3.7% Commercial Banks, Turkey PT Bank Central Asia Tbk 3.7% Commercial Banks, Indonesia Tata Consultancy Sevices Ltd. 3.5% IT Services, India Sesa Goa Ltd. 3.5% Metals & Mining, India Banco Bradesco SA 3.4% Commercial Banks, Brazil Dairy Farm International Holdings Ltd. 3.4% Food & Staples Retailing, Hong Kong It is important to recognize the effect of currency movements on the Fund s performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative 2. The energy sector comprises oil, gas and consumable fuels and energy equipment and services in the SOI. The consumer discretionary sector comprises automobiles and textiles, apparel and luxury goods in the SOI. Annual Report 3

6 effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended August 31, 2011, the U.S. dollar declined in value relative to most currencies. As a result, the Fund s performance was positively affected by the portfolio s investment predominantly in securities denominated in currencies with non- U.S. exposure. However, one cannot expect the same result in future periods. During the reporting period, we continued to search for undervalued stocks trading at what we considered attractive valuations and made key purchases in Hong Kong, Indonesia and South Africa. We also added to our investments in Russia, Pakistan and Poland. Subsequently, we invested in construction and engineering, diversified banks, consumer electronics, and metals and minerals companies. Some of the largest additions included Hyundai Development, one of South Korea s leading residential property developers; Bank Danamon, a major Indonesian bank; and Hong Kong-based VTech Holdings, a market leader in the global cordless phone market. Conversely, we made some sales in Thailand and South Korea and eliminated our exposure to Taiwan. The Fund undertook five sales during the reporting period as stocks reached their sell targets and we raised funds for income distribution. We reduced our holdings in SK Innovation and Dairy Farm and divested our investments in Taiwanese integrated circuit design company MediaTek and Thai industrial real estate companies Amata and Hemaraj Land and Development. Thank you for your continued participation in Templeton Emerging Markets Fund. We look forward to serving your future investment needs. Sincerely, Mark Mobius Executive Chairman Templeton Emerging Markets Group The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2011, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy. 4 Annual Report

7 Performance Summary as of 8/31/11 Your dividend income will vary depending on dividends or interest paid by securities in the Fund s portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. Total return reflects reinvestment of the Fund s dividends and capital gain distributions, if any, and any unrealized gains or losses. Total returns do not reflect any sales charges paid at inception or brokerage commissions paid on secondary market purchases. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Price and Distribution Information Symbol: EMF Change 8/31/11 8/31/10 Net Asset Value (NAV) +$2.32 $21.97 $19.65 Market Price (NYSE) +$1.78 $20.57 $18.79 Distributions (9/1/10 8/31/11) Dividend Income $ Performance Cumulative Total Return 1 1-Year 5-Year 10-Year Based on change in NAV % % % Based on change in market price % % % Average Annual Total Return 1 Based on change in NAV % % % Based on change in market price % % % Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Endnotes Special risks are associated with foreign investing, including currency volatility, economic instability and political developments of countries where the Fund invests. Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. The Fund is actively managed but there is no guarantee that the manager s investment decisions will produce the desired results. 1. Total return calculations represent the cumulative and average annual changes in value of an investment over the periods indicated. 2. Assumes reinvestment of distributions based on net asset value. 3. Assumes reinvestment of distributions based on the dividend reinvestment and cash purchase plan. Annual Report 5

8 Important Notice to Shareholders Share Repurchase Program The Fund s Board previously authorized management to implement an openmarket share repurchase program pursuant to which the Fund may purchase Fund shares, from time to time, in open-market transactions, at the discretion of management. This authorization remains in effect. 6 Annual Report

9 Financial Highlights Per share operating performance (for a share outstanding throughout the year) Year Ended August 31, Net asset value, beginning of year $19.65 $15.68 $19.11 $23.14 $20.56 Income from investment operations: Net investment income a Net realized and unrealized gains (losses) (2.18) (2.16) 7.47 Total from investment operations (1.99) (1.86) 7.84 Less distributions from: Net investment income (0.15) (0.14) (0.30) (0.34) (0.64) Net realized gains (1.14) (1.83) (4.62) Total distributions (0.15) (0.14) (1.44) (2.17) (5.26) Net asset value, end of year $21.97 $19.65 $15.68 $19.11 $23.14 Market value, end of year b $20.57 $18.79 $15.02 $17.63 $20.56 Total return (based on market value per share) % 26.00% (1.27)% (6.16)% 41.62% Ratios to average net assets Expenses % 1.55% c 1.55% c 1.55% c 1.55% c Net investment income % 0.78% 1.55% 1.28% 1.86% Supplemental data Net assets, end of year (000 s) $397,288 $355,286 $283,401 $345,403 $418,213 Portfolio turnover rate % 1.94% 13.03% 9.33% 33.15% a Based on average daily shares outstanding. b Based on the last sale on the New York Stock Exchange. c Benefit of expense reduction rounds to less than 0.01%. Annual Report The accompanying notes are an integral part of these financial statements. 7

10 Statement of Investments, August 31, 2011 Industry Shares Value Common Stocks 85.1% Austria 1.0% OMV AG Oil, Gas & Consumable Fuels 97,112 $ 3,837,223 Brazil 3.0% Itau Unibanco Holding SA, ADR Commercial Banks 666,033 12,095,159 China 20.6% Aluminum Corp. of China Ltd., H Metals & Mining 9,792,000 6,552,398 Anhui Tianda Oil Pipe Co. Ltd., H Energy Equipment & Services 7,714,000 1,684,301 a Brilliance China Automotive Holdings Ltd Automobiles 32,040,000 39,093,746 China Petroleum and Chemical Corp., H Oil, Gas & Consumable Fuels 7,136,000 7,038,940 Chiwan Wharf Holdings Ltd., B Transportation Infrastructure 2,126,967 2,633,474 Guangzhou Automobile Group Co. Ltd., H Automobiles 10,518,034 11,374,645 PetroChina Co. Ltd., H Oil, Gas & Consumable Fuels 9,248,000 11,877,882 Win Hanverky Holdings Ltd Textiles, Apparel & Luxury Goods 13,416,000 1,395,723 81,651,109 Hong Kong 5.9% Dairy Farm International Holdings Ltd Food & Staples Retailing 1,606,800 13,320,372 Victory City International Holdings Ltd Textiles, Apparel & Luxury Goods 29,379,107 3,546,971 VTech Holdings Ltd Communications Equipment 568,600 6,565,348 Hungary 1.1% 23,432,691 a MOL Hungarian Oil and Gas Nyrt Oil, Gas & Consumable Fuels 45,775 4,234,926 India 9.9% National Aluminium Co. Ltd Metals & Mining 2,660,120 3,693,966 Oil & Natural Gas Corp. Ltd Oil, Gas & Consumable Fuels 1,083,180 6,223,555 Peninsula Land Ltd Real Estate Management & Development 1,391,390 1,398,985 Sesa Goa Ltd Metals & Mining 2,716,280 13,883,868 Tata Consultancy Services Ltd IT Services 617,600 14,032,195 39,232,569 Indonesia 8.5% PT Astra International Tbk Automobiles 2,195,000 17,607,311 PT Bank Central Asia Tbk Commercial Banks 15,134,500 14,599,328 PT Bank Danamon Indonesia Tbk Commercial Banks 2,632,500 1,655,034 33,861,673 Mexico 2.0% Wal-Mart de Mexico SAB de CV, V Food & Staples Retailing 3,022,000 8,103,189 Pakistan 1.8% a Faysal Bank Ltd Commercial Banks 16,225,701 1,685,377 MCB Bank Ltd Commercial Banks 2,811,279 5,424,880 7,110,257 8 Annual Report

11 Statement of Investments, August 31, 2011 (continued) Industry Shares Value Common Stocks (continued) Poland 0.1% Polnord SA Construction & Engineering 114,592 $ 598,934 Russia 7.1% Gazprom, ADR Oil, Gas & Consumable Fuels 540,444 6,566,395 b LUKOIL Holdings, ADR Oil, Gas & Consumable Fuels 101,006 6,030,058 b LUKOIL Holdings, ADR (London Stock Exchange)..... Oil, Gas & Consumable Fuels 36,510 2,196,076 Mining and Metallurgical Co. Norilsk Nickel Metals & Mining 44,679 11,160,272 OAO TMK Energy Equipment & Services 660,934 2,083,353 28,036,154 South Africa 0.5% Impala Platinum Holdings Ltd Metals & Mining 79,050 2,031,949 South Korea 5.8% Avista Inc Textiles, Apparel & Luxury Goods 347,028 1,955,271 Hyundai Development Co Construction & Engineering 310,080 7,264,998 Neopharm Co. Ltd Personal Products 302,793 1,896,544 SK Innovation Co. Ltd Oil, Gas & Consumable Fuels 75,756 12,022,503 23,139,316 Thailand 10.0% Kasikornbank PCL, fgn Commercial Banks 2,251,200 9,550,773 Kiatnakin Bank PCL, fgn Commercial Banks 8,084,600 9,317,478 Land and Houses PCL, fgn Real Estate Management & Development 8,514,132 2,062,050 PTT Exploration and Production PCL, fgn Oil, Gas & Consumable Fuels 1,226,600 7,170,703 PTT PCL, fgn Oil, Gas & Consumable Fuels 578,000 6,352,497 Siam Cement PCL, fgn Construction Materials 415,120 5,241,869 39,695,370 Turkey 5.8% Akbank TAS Commercial Banks 3,936,307 14,830,382 Tupras-Turkiye Petrol Rafinerileri AS Oil, Gas & Consumable Fuels 427,186 8,186,134 23,016,516 United Kingdom 2.0% Anglo American PLC Metals & Mining 191,995 8,013,587 Total Common Stocks (Cost $194,453,140) ,090,622 Preferred Stocks 14.2% Brazil 14.2% Banco Bradesco SA, ADR, pfd Commercial Banks 755,308 13,482,248 Petroleo Brasileiro SA, ADR, pfd Oil, Gas & Consumable Fuels 670,320 17,864,028 Vale SA, ADR, pfd., A Metals & Mining 966,300 24,959,529 Total Preferred Stocks (Cost $18,224,142)... 56,305,805 Annual Report 9

12 Statement of Investments, August 31, 2011 (continued) Shares Total Investments before Short Term Investments (Cost $212,677,282) $394,396,427 Short Term Investments (Cost $2,798,218) 0.7% Money Market Funds 0.7% United States 0.7% a,c Institutional Fiduciary Trust Money Market Portfolio... 2,798,218 2,798,218 Total Investments (Cost $215,475,500) 100.0% ,194,645 Other Assets, less Liabilities 0.0% ,595 Net Assets 100.0% $397,288,240 Value See Abbreviations on page 20. Rounds to less than 0.1% of net assets. a Non-income producing. b At August 31, 2011, pursuant to the Fund s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited or extended period of time due to ownership limits and/or potential possession of material non-public information. c See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. 10 The accompanying notes are an integral part of these financial statements. Annual Report

13 Financial Statements Statement of Assets and Liabilities August 31, 2011 Assets: Investments in securities: Cost - Unaffiliated issuers $212,677,282 Cost - Sweep Money Fund (Note 7) ,798,218 Total cost of investments $215,475,500 Value - Unaffiliated issuers $394,396,427 Value - Sweep Money Fund (Note 7) ,798,218 Total value of investments ,194,645 Foreign currency, at value (cost $9,527) ,527 Receivables: Dividends ,316,724 Foreign tax ,607 Total assets ,533,503 Liabilities: Payables: Investment securities purchased ,527 Affiliates ,907 Deferred tax ,659 Accrued expenses and other liabilities ,170 Total liabilities ,245,263 Net assets, at value $397,288,240 Net assets consist of: Paid-in capital $212,488,706 Undistributed net investment income ,937,278 Net unrealized appreciation (depreciation) ,017,499 Accumulated net realized gain (loss) (155,243) Net assets, at value $397,288,240 Shares outstanding ,085,107 Net asset value per share $21.97 Annual Report The accompanying notes are an integral part of these financial statements. 11

14 Financial Statements (continued) Statement of Operations for the year ended August 31, 2011 Investment income: Dividends (net of foreign taxes of $1,090,623) $10,124,033 Expenses: Management fees (Note 3a) ,071,688 Administrative fees (Note 3b) ,415 Transfer agent fees ,921 Custodian fees (Note 4) ,159 Reports to shareholders ,608 Registration and filing fees ,006 Professional fees ,675 Trustees fees and expenses ,773 Other ,250 Total expenses ,182,495 Net investment income ,941,538 Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ,992,275 Foreign currency transactions (2,787) Net realized gain (loss) ,989,488 Net change in unrealized appreciation (depreciation) on: Investments ,459,571 Translation of other assets and liabilities denominated in foreign currencies ,802 Change in deferred taxes on unrealized appreciation (702,659) Net change in unrealized appreciation (depreciation) ,763,714 Net realized and unrealized gain (loss) ,753,202 Net increase (decrease) in net assets resulting from operations $44,694, The accompanying notes are an integral part of these financial statements. Annual Report

15 Financial Statements (continued) Statements of Changes in Net Assets Year Ended August 31, Increase (decrease) in net assets: Operations: Net investment income $ 3,941,538 $ 2,692,212 Net realized gain (loss) from investments and foreign currency transactions ,989,488 1,426,996 Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes ,763,714 70,072,348 Net increase (decrease) in net assets resulting from operations ,694,740 74,191,556 Distributions to shareholders from net investment income (2,692,868) (2,542,876) Capital share transactions (Note 2) ,892 Net increase (decrease) in net assets ,001,872 71,885,572 Net assets: Beginning of year ,286, ,400,796 End of year $397,288,240 $355,286,368 Undistributed net investment income included in net assets: End of year $ 3,937,278 $ 2,691,396 Annual Report The accompanying notes are an integral part of these financial statements. 13

16 Notes to Financial Statements 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Emerging Markets Fund (Fund) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as a closed-end investment company. The following summarizes the Fund s significant accounting policies. a. Financial Instrument Valuation The Fund s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Fund s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value. Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined. Over-the-counter securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing net asset value. The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund s portfolio securities as determined at the 14 Annual Report

17 Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) a. Financial Instrument Valuation (continued) foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. At August 31, 2011, a market event occurred resulting in a portion of the securities held by the Fund being valued using fair value procedures. b. Foreign Currency Translation Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund s Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. c. Income and Deferred Taxes It is the Fund s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns Annual Report 15

18 Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) c. Income and Deferred Taxes (continued) in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of August 31, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation. The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. d. Security Transactions, Investment Income, Expenses and Distributions Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. e. Accounting Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. f. Guarantees and Indemnifications Under the Fund s organizational documents, its officers and trustees are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, 16 Annual Report

19 Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) f. Guarantees and Indemnifications (continued) in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At August 31, 2011, there were an unlimited number of shares authorized (without par value). Transactions in the Fund s shares were as follows: Year Ended August 31, Shares Amount Shares Amount Shares issued in reinvestment of distributions... $ 12,074 $236,892 The Fund s Board of Trustees previously authorized an open-market share repurchase program pursuant to which the Fund may purchase, from time to time, Fund shares in open-market transactions, at the discretion of management. This authorization remains in effect. During the years ended August 31, 2011 and August 31, 2010, there were no shares repurchased. 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries: Subsidiary Templeton Asset Management Ltd. (TAML) Franklin Templeton Services, LLC (FT Services) Affiliation Investment manager Administrative manager a. Management Fees Effective May 1, 2011, the Fund pays an investment management fee to TAML based on the average daily net assets of the Fund as follows: Annualized Fee Rate Net Assets 1.100% Up to and including $1 billion 1.050% Over $1 billion, up to and including $5 billion 1.000% Over $5 billion, up to and including $10 billion 0.950% Over $10 billion, up to and including $15 billion 0.900% Over $15 billion, up to and including $20 billion 0.850% In excess of $20 billion Annual Report 17

20 Notes to Financial Statements (continued) 3. TRANSACTIONS WITH AFFILIATES (continued) a. Management Fees (continued) Prior to May 1, 2011, the Fund paid fees to TAML based on the average daily net assets of the Fund as follows: Annualized Fee Rate Net Assets 1.250% Up to and including $500 million 1.200% Over $500 million, up to and including $3 billion 1.150% Over $3 billion, up to and including $4 billion 1.100% Over $4 billion, up to and including $15 billion 1.050% Over $15 billion, up to and including $20 billion 1.000% In excess of $20 billion b. Administrative Fees The Fund pays an administrative fee to FT Services of 0.15% per year of the average daily net assets of the Fund. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund s custodian expenses. During the year ended August 31, 2011, there were no credits earned. 5. INCOME TAXES During the year ended August 31, 2011, the Fund utilized $3,946,208 of capital loss carryforwards. The tax character of distributions paid during the years ended August 31, 2011 and 2010, was as follows: Distributions paid from ordinary income $2,692,868 $2,542,876 At August 31, 2011, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments $216,676,811 Unrealized appreciation $204,904,208 Unrealized depreciation (24,386,374) Net unrealized appreciation (depreciation) $180,517,834 Undistributed ordinary income $ 3,937,278 Undistributed long term capital gains ,046,066 Distributable earnings $ 4,983, Annual Report

21 Notes to Financial Statements (continued) 5. INCOME TAXES (continued) Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of wash sales. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended August 31, 2011, aggregated $10,995,895 and $11,675,449, respectively. 7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund invests in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 9. FAIR VALUE MEASUREMENTS The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund s investments and are summarized in the following fair value hierarchy: Level 1 quoted prices in active markets for identical securities Level 2 other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) Level 3 significant unobservable inputs (including the Fund s own assumptions in determining the fair value of investments) Annual Report 19

22 Notes to Financial Statements (continued) 9. FAIR VALUE MEASUREMENTS (continued) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement. The following is a summary of the inputs used as of August 31, 2011, in valuing the Fund s assets and liabilities carried at fair value: Assets: Investments in Securities: Equity Investments: a Level 1 Level 2 Level 3 Total Indonesia $ $33,861,673 $ $ 33,861,673 Turkey ,016,516 23,016,516 All Other Equity Investments b ,518, ,518,238 Short Term Investments ,798,218 2,798,218 Total Investments in Securities $340,316,456 $56,878,189 $ $397,194,645 a Includes common and preferred stocks. b For detailed categories, see the accompanying Statement of Investments. 10. NEW ACCOUNTING PRONOUNCEMENTS In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, The Fund is currently evaluating the impact, if any, of applying this provision. 11. SUBSEQUENT EVENTS The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure. ABBREVIATIONS Selected Portfolio ADR - American Depositary Receipt 20 Annual Report

23 Report of Independent Registered Public Accounting Firm To the Board of Trustees and Shareholders of Templeton Emerging Markets Fund In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Templeton Emerging Markets Fund (the Fund ) at August 31, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as financial statements ) are the responsibility of the Fund s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2011 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California October 19, 2011 Annual Report 21