Annual Management Report of Fund Performance

Transcription

1 December 31, 2018 Annual Management Report of Fund Performance This annual management report of fund performance contains financial highlights but does not contain the complete financial statements of the investment fund. If you have not received a copy of the annual financial statements with this report, you can get a copy of the annual financial statements at your request, and at no cost, by calling , by writing to us at 5000 Yonge Street, Suite 900, Toronto ON M2N 0A7, or by visiting our website at or SEDAR at Securityholders may also contact us using one of these methods to request a copy of the investment fund s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure.

2 Co-Lead Portfolio Manager David Haglund, MBA, (ME) Limited (Sub-Advisor) Industry Experience: 14 years Location: Dubai, UAE Co-Lead Portfolio Manager Ahmed Awny, CFA (ME) Limited (Sub-Advisor) Industry Experience: 21 years Location: Dubai, UAE INVESTMENT OBJECTIVE AND STRATEGIES Templeton Frontier Markets Fund (the Fund ) seeks long-term capital appreciation by investing primarily in equity securities of companies located in frontier market countries and in companies expected to benefit from developments in the economies of frontier market countries. Frontier markets are defined as countries with a stock market capitalization of less than 3% of the Morgan Stanley Capital International World Index, and are a subset of those currently considered to be developing by the World Bank, the International Finance Corporation, the United Nations or the countries authorities, and are typically located in the Asia-Pacific region, Central and Eastern Europe, the Middle East, Central and South America and Africa. As the economies and capital markets of frontier market countries evolve, the above definition of frontier markets may change slightly from time to time. RISK The risks of investing in the Fund remain as stated in the prospectus. The Fund is suitable for investors with a medium risk tolerance and a long-term investment time frame and who are seeking the above-average capital gain potential of a fund focused on investing in frontier market countries, on its own or as a small portion of a well-diversified portfolio. RESULTS OF OPERATIONS As at December 31, 2018, total net asset value of the Fund was $21.1 million, a decrease of 46.2% from December 31, This was primarily driven by $15.5 million in net redemptions and a decrease of $2.7 million in net assets from operations. During the past 12 months, the Fund s Series O units generated total returns of -8.7%. Over the same time period, the Fund s benchmark, the MSCI Frontier Markets Index ( the Index ), returned -8.7%. Index performance comparison information is provided for reference only. Geographically, an underweight exposure to Argentina was a leading contributor to relative performance, as the market recorded a significant correction over the reporting period. Off-benchmark exposures to Saudi Arabia and Peru also had a positive impact. In terms of sectors, stock selection in Financials and no exposure to Utilities drove relative performance. Selection in Consumer Staples and Consumer Discretionary further supported performance. Key stock contributors included an off-benchmark exposure to Samba Financial Group, a leading bank in Saudi Arabia, as well as underweight positions in prominent Argentine banks Banco Macro SA and Grupo Financiero Galicia SA, which ended the year with double-digit declines. The position in Banco Macro SA was also divested during the reporting period. Samba Financial Group benefited from margin expansion on the back of higher interest rates and expectations that the implementation of structural changes in the group could lead to an acceleration in loan growth in Moreover, the Saudi Arabian market, in general, saw an increase in interest from international investors as a result of decisions by key index providers, MSCI and FTSE to upgrade the country to emerging-market status. In contrast, Kuwait, detracted the most from relative performance, with both stock selection and an underweight allocation weighing on returns. Stock selection in Vietnam was another key detractor, although an underweight exposure helped offset some of the detraction. An off-benchmark exposure to Egypt further pressured returns due to that market s underperformance. In terms of sectors, stock selection in Communication Services and Health Care pressured relative returns. A lack of exposure to Real Estate and underweight exposure to Information Technology also had a negative impact. Key stock detractors included off-benchmark positions in Egypt-listed Global Telecom Holding, a major mobile services provider in the MENA region, and Binh Minh Plastics JSC, one of the largest plastic companies in Vietnam, and an underweight position in National Bank of Kuwait, a leading bank in the country. Shares in Global Telecom Holding were impacted by the withdrawal of a mandatory tender offer following a lack of approval from the local regulator. The portfolio manager divested its position in Binh Minh Plastics JSC during the reporting period. Income received from investments held, excluding net realized and/or unrealized gain (loss) on investments and derivatives, as applicable, decreased due to the results of the Fund s investment activities, including, but not limited to, those previously discussed for the period in review. RECENT DEVELOPMENTS The past 12 months saw rising geopolitical and policy risks weigh on frontier markets. However, the portfolio manager believes that markets are pricing in a worse outcome than current fundamentals dictate. The long-term structural case for frontier markets continues to center around demographics, consumption and technological advances, and the portfolio manager maintains a positive long-term view supported by attractive valuations, earnings growth and solid fundamentals.

3 The portfolio manager continues to see opportunities in sectors related to consumerism, which includes retail, food production, telecommunication and banking. In addition to positive demographic trends, increased product penetration and a growing middle class, consumerism in frontier markets also stands to benefit from a shift from unorganized to organized retail and increasing disposable income. FORWARD-LOOKING STATEMENTS Investors should take note that certain statements in this report about a fund, including its strategy and expected future performance, are forward-looking. Forward-looking statements are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as may, will, should, could, expect, anticipate, intend, plan, believe, or estimate or other similar expressions. Any statement that is made concerning future strategies or performance is also a forward-looking statement. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the forward-looking statements. The forward-looking statements are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and has sufficient capital under management to effect its investment strategies, (ii) the investment strategies will produce the results intended by the portfolio manager, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the forward-looking statements contained herein are based upon what the portfolio manager believes to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these forward-looking statements. Forward-looking statements are not guarantees of future performance. Any number of factors could contribute to differing results, including, among other things, general economic, political and market factors, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings and catastrophic events. This list of factors is not exhaustive. Investors should not place undue reliance on forward-looking information and should be aware that the Fund may not update any forward-looking statements, whether as a result of new information, future events or otherwise. RELATED PARTY TRANSACTIONS The Manager is the manager, a principal distributor and registrar and transfer agent of the Fund. The Manager is an indirect wholly-owned subsidiary of Franklin Resources, Inc., a global investment management organization known as. The Manager provides or arranges for the provision of these services for day-to-day Fund operations, including the marketing, promotion and distribution of the Fund and portfolio advisory services. In consideration of these management and portfolio advisory services, a management and administration fee is negotiated with and paid by the unitholder directly to the Manager. Franklin Templeton Services, LLC (FTS) provides the Manager with fund accounting and portfolio valuation services in connection with the Fund, and provides certain back office administration services to the Manager. As part of its agreement with each investor, the Manager also pays the operating expenses of Series O, which include services provided by FTS. As at December 31, 2018, Franklin Quotential Balanced Growth Portfolio and Templeton Frontier Markets Corporate Class held 34% and 23% of the Fund, respectively. Portfolio Advisor The Manager is the portfolio advisor of the Fund. The Manager has engaged Templeton Asset Management Ltd., an affiliate of the Manager, as sub-advisor (the Sub-Advisor ). The Sub-Advisor provides investment analysis and recommendations to the Manager and executes or arranges for brokers to execute portfolio transactions in respect of the Fund. A portion of the management fee payable by the Fund to the Manager is paid to the Sub-Advisors with respect to portfolio sub-advisory services. Principal Distributor As a principal distributor of the Fund, the Manager markets the Fund and arranges for the sale of the Fund through dealers across Canada. The Manager may retain companies to assist in the sale of certain series of units of the Fund. The Manager s affiliate, FTC Investor Services Inc. ( FTC ISI ), also acts as a principal distributor for Series F, O, OT, FT, PF and PF (Hedged) units of the Fund, as applicable. For acting as a principal distributor of the applicable series, FTC ISI receives an inter-company service fee of 0.20% of the assets under management of the applicable series from the Manager with respect to those series of units. Registrar and Transfer Agent In addition to management and portfolio advisory services, the Manager acts as the registrar and transfer agent of the Fund. These services are in the normal course of operations and are covered by the Administration Fee paid by the Fund to the Manager. Independent Review Committee As required by National Instrument Independent Review Committee for Investment Funds ( NI ), the Manager has established the IRC to review all conflict of interest matters identified and referred to the IRC by the Manager and to give its approval or recommendation, depending on the nature of the conflict of interest matter. Additional information about the IRC is available in the prospectus.

4 MANAGEMENT FEES The management and administration fees for Series O are paid by the unitholder directly to the Manager as follows: First C$200,000 to under $2.5 million 1.50% Next C$2.5 million to under $5 million 1.30% C$5 million and over 1.20% Certain institutional investors may negotiate the management and administration fees by written agreement with Franklin Templeton Investments.

5 Summary of Investment Portfolio (AS AT DECEMBER 31, 2018) REGIONAL WEIGHTINGS (%)* Middle East & Africa Latin America & Caribbean Asia Europe 1.35 INDUSTRY WEIGHTINGS (%)* Banks Food Products 7.62 Food & Staples Retailing 7.48 Oil, Gas & Consumable Fuels 5.07 Air Freight & Logistics 4.08 Wireless Telecommunication Services 4.01 Diversified Consumer Services 2.65 Beverages 2.37 Metals & Mining 2.21 Health Care Providers & Services 1.90 Industrial Conglomerates 1.69 Diversified Telecommunication Services 1.64 Transportation Infrastructure 1.21 Diversified Financial Services 1.08 Pharmaceuticals 0.87 Marine 0.80 Electronic Equipment, Instruments & Components 0.30 Specialty Retail 0.13 ASSET CLASS WEIGHTINGS (%) Common Stocks Preferred Stocks 4.29 Participatory Notes 3.68 Short-term securities and all other assets, net TOP 25 HOLDINGS (%) Cash and cash equivalents** National Bank of Kuwait SAKP 8.15 YPF Sociedad Anonima, D, American Depositary Receipt 3.72 InRetail Peru Corp Global Telecom Holding SAE 3.01 Grupo Financiero Galicia SA, American Depositary Receipt 2.80 Aramex PJSC 2.79 Human Soft Holding Co. KSC 2.65 Metropolitan Bank & Trust Co BBVA Banco Frances SA, American Depositary Receipt 2.46 KCB Group Ltd BDO Unibank Inc Credicorp Ltd Grupo Nutresa SA 2.40 PuregoldPriceClubInc Hoa Phat Group JSC 2.21 Banco Davivienda SA, Preferred 2.18 Vietnam Dairy Products JSC 2.15 Bancolombia SA, American Depositary Receipt, Preferred 2.12 Guaranty Trust Bank PLC 2.11 Brac Bank Ltd Al Rajhi Bank 2.07 Commercial International Bank Egypt SAE 2.03 Robinsons Retail Holdings Inc Intercorp Financial Services Inc TOTAL NET ASSET VALUE: $21,128,000 * Excluding short-term securities and all other assets, net. ** Cash and cash equivalents may include bonds that have a remaining term to maturity of 365 days or less that are issued by certain governments, supranational agencies or financial institutions and have a designated rating (as defined in Canadian securities law). Above is an outline of the investments held in the Fund as a percentage of the Fund s net assets. Due to ongoing portfolio transactions, the investments and percentages may have changed by the time you purchase units of the Fund. The top 25 holdings are made available quarterly, 60 days after the quarter-end. To obtain a copy, please contact a member of our client services team at or visit

6 Series O (AS AT DECEMBER 31, 2018) FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the fiscal periods ended December 31. Net assets per unit (1) Net assets beginning of period $9.31 $8.52 $8.48 $9.59 $11.16 Increase (decrease) from operations: Total revenue Total expenses Realized gains (losses) for the period (0.23) (0.32) 0.31 Unrealized gains (losses) for the period (1.59) (0.46) (1.33) Total increase (decrease) from operations (2) (0.80) (0.11) (0.23) Distributions: From income (excluding dividends) (0.01) From dividends (0.96) (0.59) (0.49) (0.82) (0.86) From capital gains (0.07) (0.29) Returns of capital Total annual distributions (3) (0.96) (0.66) (0.49) (0.83) (1.15) Net assets end of period $7.53 $9.31 $8.52 $8.48 $9.59 Ratios and supplemental data: Total net asset value ($ millions) (1) $21.13 $39.28 $43.05 $47.48 $74.04 Number of units outstanding 2,804,660 4,217,407 5,050,773 5,600,728 7,721,614 Management expense ratio (2) Management expense ratio before waivers or absorptions Trading expense ratio (3) 0.80% 0.26% 0.32% 0.49% 0.21% Portfolio turnover rate (4) 50.97% 34.23% 53.64% 32.09% 28.92% Net asset value per unit $7.53 $9.31 $8.52 $8.48 $9.59 For explanatory notes, please refer to Explanatory Notes to Financial Highlights at the end of the section. PAST PERFORMANCE The following information assumes that all distributions made by the Fund in the periods shown were reinvested in additional securities of the Fund and does not take into account sales, redemption, distribution or other optional charges that would have reduced returns. Past performance does not necessarily indicate how the Fund will perform in the future. Year-by-Year Returns The bar chart shows the Fund s annual performance for each of the years shown, and illustrates how the investment Fund s performance has changed from year to year. In percentage terms, the bar chart indicates how much an investment made on January 1 would have grown or decreased by the December 31 of each year shown. 40% 20% 0% -20% * % 22.3% 28.9% -3.8% -2.9% 6.2% 17.1% -8.7% Annual Compound Returns The table shows the annual compound total returns for each of the periods shown ended December 31, The returns are compared against the benchmark(s) over the same period. 1Year 3 Years 5 Years 10 Years Since Inception Series O Units -8.7% 4.3% 1.2% N/A 5.8% MSCI Frontier Emerging Markets Select Countries Capped Index -4.8% 5.2% 6.9% N/A 8.5% MSCI Frontier Markets Index -8.7% 4.0% 6.3% N/A 8.4% For a definition of the benchmark(s), please refer to Benchmark(s) Information at the end of the section. -40% *2011 Series O return: July 18 to December 31

7 EXPLANATORY NOTES TO FINANCIAL HIGHLIGHTS NOTES TO FINANCIAL HIGHLIGHTS Net Assets per Unit: (1) This information is derived from the Fund s audited annual financial statements. In the period a fund or series is established, the financial information is provided from the date of inception to the end of the period. In cases where the net assets per unit presented in the financial statements differ from the net asset value calculated for Fund pricing purposes, an explanation of these differences can be found in the notes to the financial statements. (2) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/(decrease) in net assets from operations is based on the weighted average number of units outstanding over the fiscal period. This table is not intended to be a reconciliation of opening and closing net assets per unit. (3) Distributions were paid in cash or reinvested in additional units of the Fund or both, and exclude distributions of management fee reductions to unitholders. BENCHMARK(S) INFORMATION MSCI Frontier Emerging Markets Select Countries Capped Index was developed by MSCI for the Fund s investment manager and represents a capped version of the MSCI Frontier Emerging Markets Index (FEMI). MSCI applies caps on the exposure of the MSCI FEMI to emerging market and frontier market countries to create the MSCI FEMI Select Countries Capped so that the index reflects predominantly frontier market countries. MSCI Frontier Markets Index represents the performance of equity markets within frontier markets countries. It consists of individual equity indices from 25 countries: Argentina, Bahrain, Bangladesh, Bulgaria, Croatia, Estonia, Jordan, Kenya, Kuwait, Lebanon, Lithuania, Kazakhstan, Mauritius, Nigeria, Oman, Pakistan, Qatar, Romania, Serbia, Slovenia, Sri Lanka, Tunisia, Ukraine, the United Arab Emirates and Vietnam. Ratios and Supplemental Data: (1) This information is provided as at the period-end of the year shown. (2) Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of net asset value during the period. (4) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling each security in its portfolio once in the course of the relevant period. The higher the portfolio turnover rate in the period, the greater the trading costs payable by the Fund and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of the Fund. OTHER FUND INFORMATION Reported year-by-year returns for past years may be revised, based on the results of recalculations, audits and/or other historical review processes. Such revisions are considered immaterial to performance disclosure unless otherwise stated. Series I, V and O, as applicable, are presently capped (closed to new investors). Investors who currently own units of Series I, Series V and Series O may continue to purchase additional units in those series. These series may become available for purchase by new investors at the discretion of the Manager. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute.