Templeton Global Bond Fund Advisor Class

Transcription

1 Templeton Global Bond Fund Advisor Class Unconstrained Fixed Income Product Profile Product Details 1 Fund Assets $38,277,228, Fund Inception Date 09/18/1986 Number of Securities 157 Including Cash NASDAQ Symbol TGBAX Maximum Sales Charge 0.00 Investment Style Unconstrained Benchmark Citigroup World Government Bond Index Lipper Classification International Income Funds Morningstar Category World Bond Dividend Frequency Monthly, on or near the 20th Asset Allocation 2 FIXED INCOME CASH & CASH EQUIVALENTS % 25% 50% 75% 100% Fund Description The fund seeks current income with capital appreciation and growth of income, by investing at least 80% of its net assets in bonds of governments, government related entities and government agencies located anywhere in the world. The fund regularly enters into various currency-related and other transactions involving derivative instruments. Performance Data 3,4 Average Annual Total Returns 5 (%) Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs (09/18/1986) Advisor Class Citigroup World Government Bond Index 10% 5% 0% -5% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception Advisor Class Citigroup World Government Bond Index Total Annual Operating Expenses With Waiver: 0.68% Without Waiver: 0.74% 30-Day Standardized Yield 6 With Waiver: 4.73% Without Waiver: 4.67% 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. Advisor Class shares are offered only to certain eligible investors as stated in the prospectus. They are offered without sales charges or Rule 12b-1 fees. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. The fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 04/30/2018. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower All holdings are subject to change. 2. Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 4. 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. 5. Periods shorter than one year are shown as cumulative total returns. 6. The fund s 30-day standardized yield is calculated over a trailing 30-day period using the yield to maturity on bonds and/or the dividends accrued on stocks. It may not equal the fund s actual income distribution rate, which reflects the fund s past dividends paid to shareholders. Not FDIC Insured May Lose Value No Bank Guarantee

2 Calendar Year Returns (%) Advisor Class Citigroup World Government Bond 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. Portfolio Manager Insight 7 Market Review During the first quarter, the US Federal Reserve (Fed) raised the federal funds target rate 25 basis points (bps) to a range of 1.50% to 1.75% at its March meeting and remained on course for two more rate hikes in Despite a decline in the 10-year US Treasury (UST) note s yield during the final week of March, the yield was still 33 bps higher year-to-date in 2018 (through March 31). We continue to expect UST yields to rise as the Fed tightens policy while US inflation pressures pick up. Equity market volatility and uncertainty over the potential impacts of protectionist trade policies appeared to drive some risk aversion in the markets; however, US economic resilience and growing inflation pressures are expected to continue in The Fed continued to unwind its UST positions at a targeted pace of US$12 billion per month in 2018 s first quarter and intends to raise that monthly volume to US$18 billion per month in the second quarter. We also expect the Fed s balance sheet unwinding to put upward pressure on yields. Overall, we continue to expect UST yields to rise with growing inflation pressures in an environment of economic resilience and exceptionally strong US labor markets. In Europe, the yield on the 10-year German Bund moderately rose while short-term yields in the eurozone remained negative. The euro strengthened against the US dollar during the quarter; however, we continue to expect the euro to weaken on widening rate differentials between the rising yields in the US and the low to negative yields in the eurozone. European Central Bank (ECB) President Mario Draghi has continued to indicate that monetary policy will remain accommodative in 2018, and that rates are not likely to rise until quantitative easing (QE) measures end. Currently, the ECB s bond-buying program is scheduled to continue through at least September 2018, with the possibility of continuing at a reduced pace in subsequent months. We think the ECB will keep rates unchanged in We also continue to see ongoing risks to political cohesion across Europe as populist movements continue to influence the political discourse. In Germany, Angela Merkel agreed to a coalition government with the Social Democrats (SPD), but remained in a politically weakened position. The euro continues to be vulnerable to unresolved structural and political risks, in our view. In Japan, we expect Abenomics programs to continue as planned. The Bank of Japan (BOJ) continued with its QE program during the quarter as shortterm yields in Japan remained negative. Rising UST yields should produce better conditions for the BOJ s monetary accommodation to weaken the yen. The BOJ continues to target a 0.0% yield on the 10-year Japanese government bond. The Japanese yen strengthened against the US dollar during the quarter; however, we expect it to weaken in upcoming quarters on widening rate differentials with the US. In emerging markets, yields broadly rose across Asia ex Japan and declined across much of Latin America. Emerging-market currencies broadly appreciated against a weaker US dollar during the quarter, with a few notable exceptions. Overall, we continue to see a number of local-currency markets that we believe remain undervalued, particularly in India, Indonesia, Mexico and Colombia. We also see attractive risk-adjusted yields in places like Brazil and Argentina. On the whole, we expect select currencies to appreciate over the medium term, particularly in countries with economic resilience and relatively higher, maintainable rate differentials. Performance Review For the quarter, the fund s positive absolute performance was primarily attributable to interest-rate strategies. Currency positions detracted from absolute results, while sovereign credit exposures had a largely neutral effect. On a relative basis, the fund s underperformance of its benchmark index was primarily due to currency positions. Interest-rate strategies contributed to relative results, while sovereign credit exposures had a largely neutral effect. Currency Analysis Among currencies, the fund s net-negative positions in the Japanese yen and the euro detracted from absolute performance, while currency positions in Latin America (the Mexican peso) contributed. On a relative basis, the fund s underweighted positions in the Japanese yen and the euro detracted from relative results, while overweighted currency positions in Latin America (the Mexican peso) contributed. Duration Analysis The fund maintained a defensive approach regarding interest rates in developed markets, while holding duration exposures in select emerging markets. Negative duration exposure to USTs contributed to absolute performance, as did select duration exposures in Latin America (Brazil). Underweighted duration exposure in the United States contributed to relative results, as did select overweighted duration exposures in Latin America (Brazil). However, select underweighted duration exposures in Europe detracted from relative performance. Sovereign Credit Analysis As stated earlier, sovereign credit exposures had largely neutral effects on absolute and relative performance. Portfolio Positioning During the quarter, we remained positioned in a number of emerging markets, with notable local-currency duration exposures in Brazil, Argentina, Colombia, Indonesia and India, and notable currency exposure to the Mexican peso. We largely exited our local-currency positions in South Africa in February. We continued to hold net-negative positions in the euro and Japanese yen based on our expectations for widening rate differentials with the US as the Fed tightens policy while the ECB and BOJ continue with monetary accommodation. The short positions in the euro and yen represent directional views on the currencies, as well as hedges against broad strengthening of the US dollar. The short euro position is also a hedge against euroskeptic political risks and unresolved structural risks in Europe. We also continued to hold net-negative positioning in the Australian dollar based on the Reserve Bank of Australia s accommodative rates, and as a partial hedge against potential economic risks in China and broad-based beta risk across emerging markets. In credit markets, we continued to see areas of value in some specific sovereign credits. We also remained positioned for rising yields by maintaining low overall portfolio duration and holding negative duration exposure to USTs through interest-rate swaps. franklintempleton.com 2

3 Outlook & Strategy Recent US protectionist policies in the form of steel and aluminum tariffs, and sector-specific tariffs on China, have the potential to impact growth and raise costs for consumers. Trade restrictions will likely add to existing inflation. US consumers had been benefiting from cheaper goods for decades trade restrictions would shift the current benefits that consumers enjoy (cheaper goods) to a narrow sector of manufacturers of specific products. At this stage, the risks of a full-scale retaliatory trade war appear contained, but an escalating trade conflict that damages global growth remains possible. Exchange rate tensions and trade frictions around the world could continue for some time, but we do not see trade coming to a standstill or the global economy toppling into a recession. Overall, we continue to have a positive outlook for US growth and the global economy for 2018, but we continue to watch for potential economic disruptions. One of the trade-offs of tax reform was the likelihood that it will increase the deficit, which raises the borrowing needs of the government. Theoretically, tax reform was intended to be revenue neutral over 10 years, but in the near term the deficit is likely to grow. Concurrently, the Fed is no longer funding the deficit through its QE program and is instead reducing its UST holdings. Rising deficits and diminished bond-buying from the Fed should pressure UST yields higher, in our view. We expect the glide path of monetary policy to remain largely unchanged in 2018, under the new Fed chairmanship of Jay Powell. The pace of balance sheet unwinding and expected rate hikes this year are likely to stay on the course outlined by the previous committee, in our view. The reduction of the Fed s balance sheet will be a significant change factor for bond markets in the upcoming year we think those effects are being underappreciated by markets and that USTs remain overvalued. On the whole, we continue to expect inflation pressures to rise with resilience in the US economy and exceptionally strong US labor markets. We have seen wage pressures pick up in specific pockets of the economy, and we expect those pressures to accelerate. Policy constraints on immigration have also been pressuring wages in various labor sectors. Additionally, financial sector deregulation has the potential to accelerate credit activity, stimulate investment and accelerate the velocity of money, which would further drive inflation. Fiscal expansion and the effects of tax reform can similarly add to the inflation dynamics. Overall, we see preconditions for rising inflation over the next couple years, which should pressure yields higher. In the major developed economies, we anticipate continued monetary accommodation and low rates in Japan and the eurozone while rates rise in the US those increasing rate differentials should depreciate the yen and euro against the US dollar, in our opinion. With the recent upturns in global growth, there should be less demand for perceived safe-haven assets, yet the yen has strengthened in recent months that trend is inconsistent with historical correlations, in our assessment, and we expect it to reverse on stronger global growth and rising rates in the US. Additionally, we expect the BOJ s current monetary stance to remain largely unchanged in the upcoming year. BOJ Governor Haruhiko Kuroda was formally confirmed to another five-year term in March. The current BOJ is very dovish, and Prime Minister Shinzo Abe needs a dovish central bank. With yields rising in the US, the rate differentials with Japanese government bonds should widen, which should ultimately flow through to the exchange rate, weakening the yen and strengthening the US dollar. Our view on the yen would likely adjust if we expected an end in this growth cycle, or a global crisis, but we do not see an end to the cycle quite yet. A large part of the recent strength in the euro has been driven by optimism in Europe. Growth in the eurozone has notably improved, so part of the optimism is deserved. Yet the economy still needs accommodative monetary policy (according to the ECB), and inflation has remained persistently subdued, below the ECB s target. Additionally, we think eurozone growth has peaked in the current cycle and is not likely to be as strong as it was in Thus we do not see Europe narrowing the growth differential with the US in the upcoming year. We expect the widening rate differentials with the US should ultimately weaken the euro and pull the US dollar stronger. We have recently focused on countries that are less externally vulnerable and more domestically driven, and that have demonstrated their resilience to potential increases in trade costs. Specific emerging markets that have higher rate environments and domestically oriented economies are likely to fare better in a rising-rate environment than countries with low yields and more externally driven economies, in our view. In Asia, we currently prefer countries with strong domestic drivers that are less leveraged to China, such as India and Indonesia, while we have moved away from economies that are more externally dependent, such as Malaysia. In Latin America, we are focused on countries that have turned away from previous failed experiments with populism, such as Brazil and Argentina, and are now moving toward more orthodox policies with credible monetary policy, proactive business environments and outward-looking trade. We also see attractive valuations in countries like Mexico and Colombia that have maintained sound policy discipline while broadening their economies beyond commodities. China s economy remains in a soft landing, but ongoing rebalancing is needed for the long term. The near-term picture looks fairly stable, in our assessment, but we have concerns for two or three years down the road as China s pace of growth now depends on significantly more credit expansion than it did a decade ago. The Chinese authorities appear aware of this, but it remains to be seen if they can effectively manage a slowdown in credit. We have seen a number of policies wind down, but we do not expect a hard landing at this point. However, if China has not reduced its credit dependence in a couple years and we get an exogenous shock, such as an eventual recession in the US, then China s ability to intervene to stimulate its economy will be substantially less effective than it was during the last US recession. These risks warrant ongoing monitoring, but the near-term picture appears to support a continued moderation in growth and not a hard landing. Our philosophy is grounded in a focus on long-term fundamentals and patience. We believe that while markets can deviate from fundamentals in the shorter term, they tend to reflect them over the medium to long term. Thus we seek to identify and exploit the imbalances we see in the market and position for the directional trends we see going forward, ahead of inflection points. Our oftentimes contrarian viewpoint also allows us to find potential investment opportunities particularly during periods of volatility and panic, where we can exploit market mispricing. 7. 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 Characteristics 8,9,10,11 Portfolio Citigroup World Government Bond Index Average Duration Yrs 7.87 Yrs Average Weighted Maturity 3.18 Yrs 9.60 Yrs Annual Turnover Ratio (12/31/2017) 42.12% - Portfolio Diversification Geographic Allocation 12 Geographic Weightings vs. Citigroup World Government Bond Index 13,14 AMERICAS NON-US AMERICAS Brazil Mexico AMERICAS NON-US AMERICAS Brazil Mexico Colombia Colombia 4.63 Argentina 4.47 Argentina Peru USA ASIA Peru USA ASIA ASIA EX-JAPAN Indonesia Indonesia India South Korea Philippines India South Korea Philippines MIDDLE-EAST/AFRICA Ghana MIDDLE-EAST/AFRICA 2.00 EUROPE EUROPE SUPRANATIONAL ST CASH & CASH EQUIVALENTS OTHER NON-EMU EUROPE Ukraine SUPRANATIONAL ST CASH & CASH EQUIVALENTS OTHER % 0% 10% 20% 30% 40% 50% -50% -25% 0% 25% 50% 8. The portfolio characteristics listed are based on the fund s underlying holdings, and do not necessarily reflect the fund s characteristics. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 9. Average Duration and Average Weighted Maturity reflect certain derivatives held in the portfolio (or their underlying reference assets). 10. Turnover Ratio is as of the fund s fiscal year-end. 11,14. 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. 12,13. Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. franklintempleton.com 4

5 Currency Allocation 15 Currency Weightings vs. Citigroup World Government Bond Index 16,17 AMERICAS US-DOLLAR NON US-DOLLAR Mexican Peso Brazilian Real Colombian Peso Argentine Peso Peruvian Nuevo Sol MIDEAST/AFRICA ASIA ASIA EX-JAPAN Indian Rupee Indonesian Rupiah Philippine Peso South Korean Won Australian Dollar JAPANESE YEN EUROPE % -60% -40% % 0% 20% 40% 60% 80% % 120% 140% 160% 180% 200% AMERICAS US-DOLLAR NON US-DOLLAR Mexican Peso Brazilian Real Colombian Peso Argentine Peso Peruvian Nuevo Sol MIDEAST/AFRICA Ghanaian Cedi New ASIA ASIA EX-JAPAN Indian Rupee Indonesian Rupiah Philippine Peso South Korean Won Australian Dollar JAPANESE YEN EUROPE EURO -125% % -75% -50% % % 25% 50% 75% % 125% % 15,16. Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 17. 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. franklintempleton.com 5

6 Credit Quality Ratings 18 AAA AA 4.58 A BBB BBB- BB B 4.48 B NR Cash & Cash Equivalents % 5% 10% 15% 20% 25% 30% Investment Grade Non-Investment Grade Cash & Cash Equivalents Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Standard Deviation (%) Tracking Error (%) Information Ratio 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 We believe that applying a fundamental, research-driven approach focused on identifying potential sources of total return (current income and capital appreciation) worldwide and seeking to capitalize on global interest rates and currency trends provides the best potential for solid risk-adjusted returns. The strategy is run independently of its benchmark, allowing the manager to hold only the positions it believes have the best potential to maximize riskadjusted returns. This is a high alpha seeking strategy that invests globally and may include allocations to both developed and emerging markets. 18. Ratings shown are assigned by one or more Nationally Recognized Statistical Rating Organizations ( NRSRO ), such as Standard & Poor s, Moody s and Fitch. The ratings are an indication of an issuer s creditworthiness and typically range from AAA or Aaa (highest) to D (lowest). When ratings from all three agencies are available, the middle rating is used; when two are available, the lowest rating is used; and when only one is available, that rating is used. Foreign government bonds without a specific rating are assigned the country rating provided by an NRSRO, if available. If listed, the NR category consists of ratable securities that have not been rated by an NRSRO. The N/A category consists of nonratable securities (e.g., equities). Cash includes equivalents, which may be rated. Derivatives are excluded from this breakdown. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 19. The NR category includes securities that are not rated and securities not covered by a ratings agency. The N/A category may encompass negative cash, net currency forwards, and negative derivative (market value). 20. Information Ratio and Tracking Error information are displayed for the product versus the Citigroup World Government Bond Index. 21. Information Ratio is a way to evaluate a manager s ability to outperform a benchmark in relation to the risk that manager is assuming, with risk defined as deviation from the benchmark. This measure is calculated by dividing the portfolio s excess return (portfolio return less the benchmark return) by the tracking error (derived by taking the standard deviation of the monthly differences between the portfolio return and the benchmark return over time). franklintempleton.com 6

7 Investment Process Investment Strategy Long-Term, Opportunistic Value Approach Long-term, fundamentally driven investment focus Total return approach that is not benchmark driven Identify economic imbalances that may lead to value opportunities in: Yield curve Currencies Sovereign credit Active positioning across these three areas Precisely isolate desired exposures Risk budget composition will shift based on relative attractiveness during global economic and credit cycles Investment Process 22,23 Global Research Lenses Three Potential Sources of Alpha Portfolio Construction and Implementation Macro Models/Analysis Yield Curve Ideas Risk Modeling VaR Analysis Correlation Analysis Scenario/Stress Testing In-Depth Country Analysis Currency Ideas Identification of High-Conviction Opportunities Management Team Potential Return vs. Expected Risk Global Allocations P O R T F O L I O Local Asset Management Perspective Sovereign Credit Ideas Trading Trade Structuring Market Flows Local Execution/Settlement Liquidity Analysis Review/ Review Review Performance Attribution 22. The above chart is for illustrative and discussion purposes only. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. 23. The Local Asset Management Group is comprised of investment professionals located in affiliates of and joint venture partners with Franklin Templeton Investments. Investment Team Portfolio Manager Years with Firm Years Experience Michael Hasenstab, Ph. D., Executive VP & Chief Investment Officer Sonal Desai, Ph. D., Senior VP, Portfolio Manager, Director of Research 8 24 Additional Resources Global Sovereign/EMD Local Asset Management Glossary Annual Turnover Ratio: Percentage of a fund s holdings replaced with other holdings during a fund s most recent full fiscal year. Average Duration: A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Average Weighted Maturity: An estimate of the number of terms to maturity, taking the possibility of early payments into account, for the underlying holdings. Maturity is expressed as a number of years. Information Ratio: In investing terminology, the ratio of expected return to risk. Usually, this statistical technique is used to measure a manager s performance against a benchmark. This measure explicitly relates the degree by which an investment has beaten the benchmark to the consistency by which the investment has beaten the benchmark. 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 returns vary from the average of its previous returns. The larger the standard deviation, the greater the likelihood (and risk) that performance will fluctuate from the average return. Tracking Error: Measure of the deviation of the return of a product compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment is managed, the smaller the tracking error. franklintempleton.com 7

8 What Are The Risks? All investments involve risks, including possible loss of principal. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio which may result in significant volatility and cause the fund to participate in losses on an amount that exceeds the fund s initial investment. The fund may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as promised. The markets for particular securities or types of securities are or may become relatively illiquid. Reduced liquidity will have an adverse impact on the security s value and on the fund s ability to sell such securities when necessary to meet the fund s liquidity needs or in response to a specific market event. Foreign securities involve special risks, including currency fluctuations (which may be significant over the short term) and economic and political uncertainties; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a government entity may be unwilling or unable to pay interest and repay principal on its sovereign debt, or otherwise meet its obligations when due. Investments in lower-rated bonds include higher risk of default and loss of principal. Bond prices generally move in the opposite direction of interest rates. As the prices of bonds in the fund adjust to a rise in interest rates, the fund s share price may decline. Changes in the financial strength of a bond issuer or in a bond s credit rating may affect its 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. Important data provider notices and terms available at: 3. Effective 01/02/1997, the fund began offering Advisor Class Shares. For periods prior to the fund s Advisor Class inception date, a restated figure is used based on the fund s oldest share class, Class A performance, excluding the effect of Class A s maximum initial sales charge but reflecting the effect of the Class A Rule 12b-1 fees; and b) for periods after the fund s Advisor Class inception date, actual Advisor Class performance is used, reflecting all charges and fees applicable to that class. Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2018 Franklin Templeton Investments. All rights reserved. 616 PP 03/18