Franklin Founding Funds Allocation Fund Class A, C

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1 Franklin Founding Funds Allocation Fund Class A, C Total Return Multi-Asset Product Profile Product Details Fund Assets $4,746,754, Fund Inception Date 08/15/2003 Base Currency Investment Style USD Total Return Benchmark S&P 500 Index;MSCI World Index Lipper Classification Mixed-Asset Target Allocation Growth Funds Morningstar Category Allocation 70% to 85% Equity Dividend Frequency Semiannually Inception Date Class A 08/15/2003 Class C 08/15/2003 CUSIP NASDAQ Symbol Class A P 844 FFALX Class C P 828 FFACX Class A Class C Maximum Sales Charges 5.75% initial sales charge 1.00% contingent deferred sales charge (CDSC) in the first year only Total Annual Operating Expenses Class A 1% Class C 1.75% Fund Description Franklin Founding Funds Allocation Fund seeks capital appreciation through a diversified, valueoriented approach investing in a fixed allocation of three Franklin Templeton mutual funds that specifically target stocks and bonds trading at a discount to their true worth. The fund seeks income as a secondary goal. Performance Data 1,2 Average Annual Total Returns 3,4 (%) 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception Class A - With Sales Charges Class A - Without Sales Charges Class C - With Sales Charges Class C - Without Sales Charges S&P 500 Index MSCI World Index % 20% 0% -20% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception Class A - With Sales Charges Class A - Without Sales Charges S&P 500 Index MSCI World Index Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. Calendar Year Returns (% Without Sales Charges) Class A Class C S&P 500 Index MSCI World Index If the sales charge had been included, the returns would have been lower. 1. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. 2. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 3. Periods shorter than one year are shown as cumulative total returns. 4. Since inception return for the benchmark is calculated to the fund inception date. Not FDIC Insured May Lose Value No Bank Guarantee

2 Portfolio Manager Insight 5 Market Review Global equity markets advanced in US-dollar terms during the fourth quarter of Investors mainly focused on continued indications of positive economic growth from several regions and expectations surrounding tax reform in the United States. The International Monetary Fund in October upgraded its forecast for global growth in 2017 and However, it cautioned that recovery from the global financial crisis remains incomplete, and that latent risks could return as central banks pivot away from extensive stimulus. Emerging stock markets, as measured by MSCI indexes, collectively topped their developed-market peers during the fourth quarter. In emerging markets, China s third-quarter annual gross domestic product (GDP) growth was in line with consensus expectations. The World Bank lifted its forecast for China s 2017 GDP, while expecting somewhat decelerated growth in 2018 and 2019 due to domestic policy tightening. South Korea s third-quarter GDP grew year-on-year, and the country s central bank raised interest rates for the first time in six years during November. Brazil s thirdquarter GDP also rose year-on-year, and the country s central bank cut its benchmark interest rate in October and December, bringing it to an all-time low. Mexico s third-quarter annualized GDP growth was the weakest since In the United States, a major tax bill was signed into law in December that featured a significant reduction in the corporate tax rate. The US Federal Reserve (Fed) raised short-term interest rates during the same month, the latest in a series of well-flagged moves. The Fed also maintained its forecast of three rate increases in Meanwhile, third-quarter US GDP came in ahead of consensus estimates. In other developed markets, the European Central Bank (ECB) raised its forecast for eurozone GDP growth in 2017 and through 2020, though it expects growth to moderate after In early November, the Bank of England hiked its benchmark interest rate for the first time in 10 years. Japan s preliminary third-quarter GDP grew at a strongerthan-expected pace on the previous quarter and on an annualized basis. Performance Review Franklin Income Fund Equity Analysis Equities had a modest positive impact on the fund s fourth quarter 2017 returns, aided foremost by solid rallies among our energy, financials, information technology and materials holdings. Unfortunately, the fixed income side of the portfolio was a minor net detractor, based largely on steep declines for some of our health care-related bond holdings in the consumer non-cyclical sector; however, most fixed income sector/industry exposures were net contributors while four of them declined. The bulk of the fund s energy-sector equity gains occurred in December, and their combined contribution to absolute returns was led by integrated oil and gas firms such as Royal Dutch Shell and oil and gas exploration and production (E&P) industry names such as Occidental Petroleum. US crude oil prices rose to a two-and-a-half-year high above $60 per barrel by year-end. This move was driven by strong demand in many parts of the world emerging markets in particular and non-us output restraint that has begun to tighten supply-and-demand fundamentals. Additional price support stemmed from a weaker US dollar and investor optimism over the 2018 global economic outlook. Conversely, the fund s overall decline in the industrials sector was due exclusively to a steep selloff in General Electric (GE), which was our largest position therein (consisting primarily of common stock and equity-linked notes, or ELNs). The cash flow profile of this major global industrial conglomerate has eroded as its power, oil and gas segments have lagged. As a result, the company elected to cut its annual dividend and will renew its focus on reducing costs and streamlining operations. Management discussed exiting several non-core assets and segments and will instead look to its power, aviation and health care segments to drive results going forward. Fixed Income Analysis In fixed income, in terms of credit quality, highly speculative debt securities rated CCC had the most negative impact on the fund s fourth-quarter results. Although communications bonds were net detractors, our consumer non-cyclical bonds suffered the most as the fund s exposure to hospital operator Community Health Systems weighed heavily on returns. Following the company s weak quarter, investors became increasingly concerned about its ability to refinance near-term maturities, while market concerns over the potential impact of US tax reform also weighed on management s outlook. On the upside, energy sector bonds were major contributors to our fixed income results. Similar to our equity holdings, most energy high-yield corporate bonds advanced along with rising crude oil prices, particularly as the commodity s global supply-and-demand balance continued to improve. As it pertained to oil, pickups in industrial activity, employment and shipping have increased demand for refined fuel, while prices remained buoyant on signs that global consumption of petroleum products will rise further in Franklin Mutual Shares Fund During the quarter, two of the fund s largest contributors to absolute performance were Caterpillar and Cisco. Caterpillar, a manufacturer of construction and mining equipment, reported better-than-expected quarterly results and raised its 2017 revenue and earnings guidance during the year. The trend continued in October, as quarterly revenues and earnings topped consensus estimates, while full-year guidance was increased again. Finally, the company is likely to benefit from the US tax reform legislation, and would likely experience an additional boost to demand if a potential infrastructure bill comes to fruition. Cisco, a US-based networking equipment and services company, gave investors reasons to believe that its strategic shift toward a subscription-based software revenue model is starting to gain some traction, when it gave forward revenue guidance that exceeded the consensus estimate. In recent quarters, the transition has led to sales headwinds, but in November, Cisco provided quarterly guidance that included year-over-year sales growth. Management also reported solid demand for a new series of network switches. In contrast, detractors included GE and Merck & Co. The stock price of GE, a US-based industrials company with a wide range of business units, dropped when the company lowered 2017 earnings guidance in October and investors became concerned about a potential dividend cut, which occurred in November. Newly appointed Chief Executive Officer John Flannery s November shareholder presentation of the company s new strategic focus failed to impress many investors, and that, along with a franklintempleton.com 2

3 dividend reduction of 50%, led to a further drop in the stock price. The recent series of negative events does not alter our view that GE has businesses that are well positioned and operate in end markets that are exposed to long-term secular growth trends. If GE delivers on its plan to improve free cashflow generation and reduce expenses, we believe there is upside potential in the stock price. Merck & Co. is a global research-driven pharmaceutical company with solid market positions in cardio, diabetes, oncology, vaccines and animal health. A delay in the readout of a critical clinical trial involving one of Merck s most important drugs, Keytruda, overshadowed third-quarter results, which were decent considering the impact of a June cyber-attack that disrupted operations. Templeton Growth Fund The fund underperformed its benchmark for the quarter. Health care was the most significant sector detractor during the quarter, pressured both by stock selection and an overweight in the weak, defensive sector. US health care firms Allergan, Gilead Sciences and Amgen impaired relative results. Shares of pharmaceutical firm Allergan declined on concerns about competition from generics. Despite the market s excessive focus on product-specific headwinds, we estimate Allergan as a whole has one of the industry s most durable drug portfolios when it comes to exclusivity and patent protection. The company also boasts an industry-leading research and development (R&D) pipeline that, in conjunction with its base businesses, should continue to drive strong earnings and free cash flow growth over our investment horizon. More generally, continued concerns about generic competition, increasing regulatory and political scrutiny on pricing, and a consolidating payer industry all broadly pressured the health care sector throughout We view such concerns as both myopic and overstated. Generic competition is a fact of life in the pharmaceutical industry, and one best addressed through innovation, which has accelerated following the doubling of R&D investment over the last 30 years. In our analysis, the regulatory and political concerns about pricing ignore data indicating prescription drugs represent a relatively modest portion of US health care costs and actually lower costs elsewhere in the health care system. Turning to contributors, stock selection in the financials sector had a positive impact, led by led by South Korean lender KB Financial Group. Its shares rallied on a healthy macroeconomic backdrop and improving earnings prospects following the first South Korean interest-rate hike in six years. Similar to South Korea, Europe also has been benefiting from a stronger economic upcycle and the prospect of incrementally tighter monetary policy, and we remain constructive on our select banking, asset management and insurance holdings in Europe. Shares of US financial services firm Capital One Financial also gained in value, after the firm demonstrated the ability to stabilize charge-offs and stem losses through tighter underwriting and slower loan growth. Investors cheered the firm s forecast of healthy profit improvement in 2017 amid cost cuts and market share gains in the auto loan business. Improving capital ratios, a solid funding profile and expanding net interest margins were also well received and keep us positive on the stock as strategic execution continues apace. Portfolio Positioning Franklin Income Fund: Our optimism about the global economy continues to encourage our search for attractive total return investments (those providing a combination of income generation and capital appreciation) in both equity and fixed income markets. Equities continue to represent a larger weighting in the portfolio than fixed income, just as they did throughout Our equity allocation at the end of December was 56.4% of total holdings versus 39.1% for fixed income securities, compared to 54.8% and 40.1% at the end of the third quarter. Meanwhile, the cash position declined from 5.1% to 4.4%. The largest equity sector allocations at year-end 2017 were energy, financials and health care. Our largest sector exposures in fixed income were consumer non-cyclicals, energy and communications. Franklin Mutual Shares Fund: At quarter-end, the fund s investment in equities was 85.4% while the level of cash and cash equivalents stood at 6.2%. In addition, 72.0% of foreign securities exposure was hedged back to the US dollar at quarter-end. The fund initiated or added to a few select positions. We initiated a position in a US-based electric utility. While it faces meaningful near-term challenges, we believe investors became overly pessimistic about the company s longer-term prospects. We also added to our position in a large independent energy E&P company. Compared to the benchmark, the fund continued to have a meaningful overweight in the financials sector and a sizeable underweight in the information technology sector. Templeton Growth Fund: On average, the fund was overweight compared to the benchmark in the energy, health care and financials sectors. The fund was most underweight relative to the benchmark in the consumer staples, industrials and information technology sectors, with no exposure to the real estate sector. Outlook & Strategy After a false dawn in 2016, value lagged growth by the most in nearly two decades in 2017, marking the tenth year out of the past 11 that global growth has bested global value. At times like this, it may be tempting for some value investors to relax their discipline and buy the expensive stocks that have been working. Yet, countering that impulse is decades of market history suggesting that starting-point valuation is virtually all that really matters when it comes to long-term results. Meanwhile, financial repression from the world s central banks appears to have forced investors farther out the risk spectrum to chase yield and growth in a market offering little of either. We and the underlying equity fund managers view this as unsustainable for two main reasons. First, many consider zero interest-rate policies and quantitative easing to have favored capital at the expense of labor, deepening inequality and disadvantaging the majority of the electorate, whose opinions matter in a democracy. Second, financial repression could fuel potentially destabilizing asset price bubbles. Overvaluation appears to be largely concentrated in fixed income markets, as well as the growth-oriented and bond proxy stocks that have dominated this cycle. We do not know how the process of policy normalization by central banks will evolve. Nonetheless, we do believe this mature cycle will eventually change, and with it the conditions that have been so hostile to value investing. We would not want to own the leaders of the last cycle during this transition. But the stocks left behind the companies whose long-term earnings and cash flow potential we believe have been overlooked and undervalued by a narrowly focused market might be best positioned for the reversals we view as likely to unfold in the future. 5. The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager s assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund s portfolio selection process. Holdings are subject to change. franklintempleton.com 3

4 Portfolio Diversification Underlying Funds Top Ten Holdings 6 Top Holdings % APPLE INC 3.29 MICROSOFT CORP 3.21 MERCK & CO INC 2.44 ELI LILLY & CO 2.38 MEDTRONIC PLC 2.33 ROYAL DUTCH SHELL PLC 2.31 GENERAL ELECTRIC CO 2.10 WALT DISNEY CO 2.10 WELLS FARGO & CO 1.88 AMAZON.COM INC 1.86 Geographic Allocation 7 Percent of Total NORTH AMERICA EUROPE ASIA 6.63 MID-EAST/AFRICA AUSTRALIA/NZL L. AMERICA/CARIBBEAN CASH & CASH EQUIVALENTS % 10% 20% 30% 40% 50% 60% 70% 80% Supplemental Performance Statistics Supplemental Risk Statistics 8 Class A 3 Yrs 5 Yrs 10 Yrs Standard Deviation (%) Tracking Error (%) Beta Sharpe Ratio Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. Investment Philosophy Through an equal allocation to the following underlying funds Franklin Income Fund, Templeton Growth Fund and Franklin Mutual Shares Fund this combination provides diversification and an automatic rebalancing feature to help maintain equal exposure to three distinct investment strategies in any market environment. 6. Holdings of the same issuers have been combined. Top ten holdings information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. The information provided is not a recommendation to purchase, sell, or hold any particular security. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise be included. 7. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to rounding. All holdings are subject to change. 8. Beta and Tracking Error information are displayed for the product versus the S&P 500 Index. franklintempleton.com 4

5 Investment Process The fund will invest equal portions in shares of the three underlying funds, providing a cost-effective means of allocating assets across different investment advisors and types of investments. Franklin Income Fund focuses on undervalued dividend-paying stocks and bonds across a wide range of industries. Templeton Growth Fund searches worldwide for stocks selling at low prices relative to manager s appraisal of value. Franklin Mutual Shares Fund seeks to invest primarily in undervalued stocks, and to a lesser extent, distressed securities and merger arbitrage. Investment Team Portfolio Manager Years with Firm Years Experience T. Anthony Coffey, CFA, Senior Vice President - Portfolio Manager Glossary Beta: A measure of the magnitude of a portfolio s past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%. Sharpe Ratio: To calculate a Sharpe ratio, an asset s excess returns (its return in excess of the return generated by risk-free assets such as Treasury bills) are divided by the asset s standard deviation. Standard Deviation: A measure of the degree to which a fund s returns varies from the average of its previous returns. The larger the standard deviation, the greater the likelihood (and risk) that a fund s performance will fluctuate from the average return. Tracking Error: Measure of the deviation of the return of a fund compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment fund is managed, the smaller the tracking error. franklintempleton.com 5

6 What Are The Risks? All investments involve risks, including possible loss of principal. Because the fund invests in underlying funds that may engage in a variety of investment strategies involving certain risks, Franklin Founding Funds Allocation Fund is subject to these same risks. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bonds are affected by changes in interest rates and the credit worthiness of their issuers. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the fund s share prices may decline. Higher-yielding, lower-rated corporate bonds entail a greater degree of credit risk compared to investment grade securities. Foreign investing carries additional risks such as currency and market volatility and political or social instability, risks which are heightened in developing countries. Value securities may not increase in price as anticipated or may decline further in value. These and other risks are discussed in the fund s prospectus. Important Legal Information Investors should carefully consider a fund s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/ or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. Standard & Poor s, S&P and S&P 500 are registered trademarks of Standard & Poor s Financial Services LLC. S&P does not sponsor, endorse, sell or promote and S&P index-based product. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at: Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2018 Franklin Templeton Investments. All rights reserved. 481 PP 12/17