SEPTEMBER 30, 2016 FRANKLIN QUOTENTIAL PORTFOLIOS

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1 SEPTEMBER 30, 2016 FRANKLIN QUOTENTIAL PORTFOLIOS Quarterly Review

2 QUARTERLY ACTIVE MANAGEMENT REVIEW The information in this report is based on the Franklin Quotential Balanced Growth Portfolio unless stated otherwise. Global stock markets rose during 2016 s third quarter amidst generally positive macroeconomic data and accommodative monetary policy across regions. However, uncertainty about the US Federal Reserve s (Fed s) timing for raising interest rates and concerns surrounding the United Kingdom s historic vote to leave the European Union (Brexit) weighed on market sentiment at certain points. The US economy grew at a slightly faster pace in 2016 s second quarter than in the first quarter. US job additions decelerated in August, which helped persuade the Fed to keep interest rates unchanged at its September meeting. The Bank of Canada held its key interest rate unchanged in early September, and noted it expected a rebound for the country's economy in the third quarter. In Europe, concerns over Brexit eased with aggressive monetary stimulus measures and generally positive economic data in the United Kingdom. The eurozone s quarter-onquarter economic growth moderated in the second quarter. The Bank of Japan unveiled additional monetary easing measures in July, and it overhauled its monetary policy framework in September. Stephen R. Lingard, CFA Senior Vice President Franklin Templeton Solutions Portfolio Manager Franklin Quotential Portfolios Michael Greenberg, CFA, CAIA Vice President Franklin Templeton Solutions Portfolio Manager Franklin Quotential Portfolios PORTFOLIO PERFORMANCE RESULTS Returns as of September 30, 2016 (CDN$) * Annualized Returns. Inception Date 3 Mths 6 Mths 1 Yr 3 Yrs * 5 Yrs* 10 Yrs* Since Inception* Franklin Quotential Diversified Income Portfolio, Series FT 17-Feb % 2.06% 3.05% 4.45% 5.60% 4.86% 5.91% Franklin Quotential Balanced Income Portfolio, Series F 19-Aug % 2.57% 2.60% 5.76% 6.79% 4.54% 5.96% Franklin Quotential Balanced Growth Portfolio, Series F 19-Aug % 3.21% 2.30% 6.21% 7.90% 4.42% 6.23% Franklin Quotential Growth Portfolio, Series F 19-Aug % 3.66% 1.66% 6.70% 9.10% 4.03% 5.75% Franklin Quotential Diversified Equity Portfolio, Series F 9-Jun % 4.29% -0.09% 7.20% 11.37% 4.10% 6.60% CAPITAL MARKET OVERVIEW Returns as of September 30, 2016 (CDN$) * Annualized Returns. 2

3 CURRENT THEMES AND ASSET MIX DECISIONS The fund outperformed its benchmark index in the third quarter. Fund selection helped the portfolio s performance relative to its benchmark index in the third quarter. Selection was particularly beneficial to relative results in fixed income and in US equity. An underweight in fixed income modestly benefitted relative performance. Conversely, asset allocation weighed on relative returns, due to offbenchmark cash exposure, an underweight in equity and currency overlay positioning. Equity fund selection in Japan modestly detracted from relative performance. Developed-market central banks have continued to maintain accommodative and unorthodox monetary policies with few recent changes. In our view, investors may lose patience, which may negatively impact risk assets. Falling global credit growth and global confidence, along with a pullback in global financial conditions, were bearish liquidity indicators for developed markets. Our overall fund positioning is more oriented towards defensive assets. Fixed Income In fixed income, we exited a high-yield bond ETF and used the proceeds to establish a corporate bond ETF. Our internal analysis indicated valuations for US high-yield bonds were at a multi-year high and rich, and corporate fundamentals were poor. High-yield energy default rates have been rising in recent months. We found medium- and long-term spreads for corporate bonds reasonable compared to their 10-year averages. We also exited an ETF focused on Australian and New Zealand debt. We reduced our conviction in this position in August due to robust performance in recent months and an August interest-rate cut from the Reserve Bank of Australia. Equity Our cautious view on developed-market equities led us to shift our exposure in European equities from a fund and an exchange-traded fund (ETF) with broad market exposure to a European ETF focused on what we believe to be higher-quality, more defensive holdings. Valuation measures such as price-to earnings, price-to-sales (P/S) and price-to-cash flow ratios climbed higher in recent months. We also exited a Canadian stock ETF. Elsewhere, we found emerging-market equity valuations as more attractive relative to developed markets, particularly regarding P/S ratios. Accordingly, we added an emerging-markets stock ETF to boost overall exposure. At the same, we sold a small position in an Indian fund. 3

4 PORTFOLIO DIVERSIFICATION UPDATE To achieve the investment objective of the Portfolio, the Franklin Quotential investment team has the following multi-level diversification in place to help alleviate concentration risks and to provide maximum exposure to present and evolving opportunities. The weighting below represents the multi-level diversification within the Portfolio by asset class, economic sector and type of fixed income category. ASSET CLASS EQUITY SECTOR As a % of Total Equity FIXED INCOME CATEGORY As a % of Total Fixed Income Values may not total 100% due to rounding. Other Assets: Non-security holdings including cash, cash equivalents and net receivables. High Yield: Includes ratings BB, B, CCC, CC, C, D. Source: FactSet, as of September 30, Important data provider notices and terms available at 4

5 HOLDING UNDERLYING INVESTMENT POOL ALLOCATIONS Sep-16 Jun-16 Mar-16 Dec-15 Canadian Equity Funds (%) Franklin Bissett Canadian Equity Fund Franklin Bissett All Canadian Focus Fund Franklin Templeton Canadian Large Cap Fund Franklin Bissett Small Cap Fund ishares S&P/TSX 60 Index ETF N/A N/A US Equity Funds (%) Franklin U.S. Rising Dividends Fund Franklin U.S. Core Equity Fund FRANKLIN U.S. OPPORTUNITIES FUND ishares Russell 1000 Value ETF N/A SPDR S&P Bank ETF N/A N/A European Equity Funds Ex. UK (%) Franklin Mutual European Fund BMO MSCI Europe High Quality Hedged to CAD Index ETF 1.75 N/A N/A N/A SPDR EURO STOXX 50 ETF FTIF Franklin European Small-Mid Cap Growth Fund* UK Equity Funds (%) 0.50 N/A N/A N/A ishares MSCI United Kingdom ETF 0.50 N/A N/A N/A Emerging Markets Equity Funds (%) Templeton Asian Growth Fund FTIF Templeton Emerging Markets Smaller Companies Fund* ishares Core MSCI Emerging Markets ETF 1.52 N/A 0.70 N/A Templeton Frontier Markets Fund FTIF Franklin India Fund* N/A ishares MSCI China ETF N/A N/A N/A 0.96 Japanese Equity Funds (%) FTIF Franklin Japan Fund* ishares MSCI Japan Small-Cap ETF ishares MSCI Japan ETF Canadian Fixed Income Funds (%) Franklin Bissett Core Plus Bond Fund BMO Mid Federal Bond Index ETF Global Fixed Income Funds (%) Franklin Strategic Income Fund Templeton Global Bond Fund ishares TIPS Bond ETF ishares Intermediate Credit Bond ETF 2.27 N/A N/A N/A ishares iboxx USD High Yield Corporate Bond ETF N/A WisdomTree Australia & New Zealand Debt Fund N/A Alternatives (%) N/A N/A SPDR Gold Trust N/A N/A Cash & Other Assets (%) Values may not total 100% due to rounding. Source: FactSet as of September 30, Important data provider notices and terms available at * FTIF (SICAV) Funds are not available for direct purchase in Canada. Société d Investissement à Capital Variable (SICAV) is an open-end investment company governed by the laws of Luxembourg. 5

6 UNDERLYING INVESTMENT HIGHLIGHTS** Franklin US Rising Dividends Fund: Albemarle Corporation Shares of Albemarle, a specialty chemicals producer, continued to perform well, as the company reported better-than-expected financial results in the quarter, driven by a strong performance in the lithium and catalyst business and a solid performance in the bromine business. Investors also reacted favourably to Albemarle s announced acquisition of lithium conversion assets, which should help reduce its cost position, and the announced purchase of the rights to explore and acquire lithium resources in Argentina. The company has 22 consecutive years of dividend increases. Franklin U.S. Opportunities Fund: NXP Semiconductors NV NXP Semiconductors is a leader in near-field communications and encryption. Increasing usage of chipand-pin credit cards and cardless payment methods (such as a cell phone) will benefit the firm, as both rely heavily on NXP s products and intellectual property. NXP recently underwent a merger with Freescale Semiconductor, which broadened its portfolio of products into the fast growing Automotive and Internet-of- Things end-markets. The company has operations in more than 25 countries, and posted revenue of USD$6.1 billion in Franklin Euro SMID Growth Fund: Kennedy Wilson Europe Real Estate PLC Kennedy Wilson Europe Real Estate PLC (KWE) is UK-based real estate investor with assets in the United Kingdom, Ireland, Spain and Italy. There are two compelling reasons for this holding: A strong management performance record and attractive real estate assets purchased over the past two years at depressed prices following the sovereign debt crisis. With a 40-year track record of investing in depressed real estate markets globally, the firm tends to take advantage of price declines and sell when valuations recover, creating value for their shareholders. FTIF Franklin India Fund: Tata Motors Limited Tata Motors, headquartered in Mumbai, India, was founded in 1945 as a manufacturer of locomotives. Tata manufactured its first commercial vehicle in Today, it manufactures and sells passenger cars, sports utility vehicles and light and heavy commercial vehicles under the Tata brand as well as Jaguar Land Rover. The company has production facilities located in nine countries and distributes and sells on a worldwide basis. It also provides financing services for the vehicles it sells and produces vehicle parts. Tata recorded 2015 profits of USD$1.9 billion on sales of USD$39 billion and is ranked 226th on the Fortune Global 500 list of the world's biggest corporations as of * FTIF (SICAV) Funds are not available for direct purchase in Canada. Société d Investissement à Capital Variable (SICAV) is an open-end investment company governed by the laws of Luxembourg. ** Opinions and beliefs expressed are those of the fund managers as of December 31, 2015 and are subject to change without notice. 6

7 INVESTMENT OUTLOOK We have a favourable view of emerging-market equities and an unfavourable view of developed-market equities. This view reflects our comparative analysis of economic trends, flexibility in monetary policy, corporate fundamentals and valuations. PMIs have been strengthening significantly in emerging markets from low levels, whilst purchasing managers indexes have been trending sideways in developed markets. The combination of positive interest rates and positive but falling inflation led us to conclude that emerging-market central banks have more flexibility in monetary policy than many developed-market peers. In our view, central banks in developed markets appear more constrained in their options as appetite for unconventional policy appears to be diminishing because its efficacy is questionable. Stephen R. Lingard, CFA Senior Vice President Franklin Templeton Solutions Portfolio Manager Franklin Quotential Portfolios In fixed income, we held a slightly favourable view of investmentgrade bonds, whilst we found high-yield valuations rich. Based on our analysis, the carry, or yield advantage, for investment-grade bonds over US Treasuries may lead to healthy performance potential. Michael Greenberg, CFA, CAIA Vice President Franklin Templeton Solutions Portfolio Manager Franklin Quotential Portfolios Franklin Templeton Solutions (FT Solutions) is a world-wide team dedicated to global portfolio-based solutions and draws on the expertise of a number of Franklin Templeton affiliates. In Canada, the advisor to FT Solutions mandates is Fiduciary Trust Company of Canada. Opinions and beliefs expressed are those of the Portfolio s managers and Franklin Templeton Solutions. 7

8 Franklin Quotential Portfolios For more than six decades, individuals and institutions around the world have viewed Franklin Templeton Investments as a trusted partner in asset management. We leverage multiple independent investment teams to deliver truly specialized expertise across a wide range of styles and asset classes from traditional to alternative strategies and multi-asset solutions. Our investment professionals are on the ground across the globe, spotting investment ideas and potential risks firsthand. Collectively, they allow us to offer clients a unique investment perspective shaped by local insight, global context and a long-term investment horizon. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. The indicated rates of return are historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Indexes are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. The information presented herein is considered reliable at the present time; however, we do not represent that it is accurate or complete, or that it should be relied upon as such. The information presented herein is not a recommendation or solicitation to buy or sell securities. Franklin Quotential is a registered trademark owned by Franklin Templeton Investments Corp. Hamel Wealth Management Group 5575 North Service Road, Suite 101 Burlington, Ontario, L7L 6M1 Tel: (905) Fax: (905) Toll Free: (888) Franklin Templeton Investments Corp. All rights reserved. 658 HGIR 0916