Franklin Small Cap Value Fund. Advisor Class

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1 Franklin Small Cap Value Fund Advisor Class Value Equity Product Profile Product Details 1 Fund Assets $2,648,115, Fund Inception Date 03/11/1996 Number of Issuers 151 NASDAQ Symbol Maximum Initial Sales Charge Investment Style Benchmark Lipper Classification Morningstar Category Dividend Frequency Asset Allocation 2 Percent of Total EQUITY CASH & CASH EQUIVALENTS 3.46 FVADX 0.00 Value Russell 2000 Value Index Small-Cap Value Funds Small Value Annually in December Fund Description The fund seeks long term total return by investing at least 80% of its net assets in the equity securities of smaller companies. Smaller companies are defined as companies with market capitalizations, at time of purchase, not exceeding either the highest market capitalization in the Russell 2000 Index or the 12-month average of the highest market capitalization in the Russell 2000 Index, whichever is greater. Performance Data 3,4 Average Annual Total Returns 5 (%) Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs (03/11/1996) Advisor Class Russell Value Index 20% 10% 0% -10% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception FIXED INCOME 0.85 Advisor Class Russell 2000 Value Index 0% 25% 50% 75% 100% 125% Total Annual Operating Expenses With Waiver:0.8% Without Waiver: 0.82% 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 02/28/2019. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower. Calendar Year Returns (%) Advisor Class Russell Value Index 1. All holdings are subject to change. Holdings of the same issuers have been combined. 2. 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. 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. Not FDIC Insured May Lose Value No Bank Guarantee

2 Portfolio Manager Insight 6 Market Review In the United States, major market indexes declined in the first quarter as volatility returned to financial markets. Positive corporate earnings news, the anticipated positive impact of major US tax reform legislation and a depreciating US dollar were tailwinds that contributed to a solid start for equities in January. However, stocks fell in early February as investors grew concerned by potentially rising price pressures, higher bond yields and the rally in stocks outpacing gains in corporate earnings. A spike in US equity market volatility added to investor anxiety. US indexes dropped again in March. Fear of escalating tariffs between the United States and its trade partners, particularly China, was the biggest reason. Concern regarding consumer data privacy and potentially tighter regulatory controls of information technology companies also hurt stocks. Nine of the 11 major equity sectors within the Russell 2000 Value Index declined, led by energy, telecommunication services, real estate and consumer staples. The health care and financials sectors managed to post gains. Business surveys continued to show a brisk pace of US economic activity and labor market conditions continued to improve, while consumer spending slowed. Fourth-quarter earnings grew at a healthy year-over-year pace, and consensus 2018 earnings estimates were solid. The US Federal Reserve s (Fed s) Federal Open Market Committee raised interest rates in March, as widely expected. However, remarks by Fed Chair Jerome Powell and other Fed officials indicated that conditions may lead the Fed to raise rates more than investors had previously expected. In addition, the Fed s Summary of Economic Projections report released in March showed expectations of lower unemployment, faster economic growth and a potentially greater number of interest-rate hikes by 2020 than its December report. Performance Review The fund s best-performing stocks on a contribution-to-return basis included Zebra Technologies, McGrath RentCorp and Hunting. Zebra Technologies is a leader in the automatic identification and data capture market, which provides products (hardware and software) and services in data capture, enterprise mobile computing and barcode printing. During the period, Zebra reported better-than-expected results driven by strong organic growth across all major product categories and regions. Revenue and earnings guidance for the next quarter also topped consensus estimates. Zebra continued to reduce the debt on its balance sheet and completed a debt restructuring plan that lowered the overall interest rate on its debt. Going forward, we expect the migration from Microsoft (not a fund holding) to Android-based products to increase revenues and a further reduction in debt to strengthen its balance sheet. Shares of McGrath RentCorp, a lessor of modular offices, classrooms, electronic test equipment and containers, benefited from broad-based strength and improving return on invested capital. In addition, McGrath is expected to benefit from the recently enacted Tax Cuts & Jobs Act, which may reduce its tax rate to 27%, from approximately 39%. We believe the company is well positioned to benefit from continued increases in education funding and greater demand for tanks used in fracking. In addition, the company could be a beneficiary of increased demand for electronic testing equipment utilized by wireless carriers in the implementation of new 5G wireless technology. As evidence of the positive operating backdrop and outlook for the future, McGrath raised its dividend by 31% in late February. Shares of Hunting, an equipment provider for onshore and offshore well construction, completion and intervention services, rose with the price of crude oil. In addition, the stock price benefited from a better-than-expected trading update in March as robust onshore drilling activity in the United States boosted Hunting s well completion business segment, which accounted for 65% of sales in Profits for full-year 2017 were expected to be minimal due to continued weakness in its offshore end markets, but Hunting s results indicated a better performance in the second half of Given the improvement in its operating results, Hunting also was able to loosen covenant restrictions placed on it by its lenders, allowing for the potential resumption of dividends in the future. Detractors from absolute performance included The Manitowoc Company, Spirit Airlines and Mueller Industries. Shares of Manitowoc, a leading producer of cranes throughout the world, fell despite a strong finish to Investors appeared concerned that the Trump administration s steel tariffs will negatively affect the profit margins of Manitowoc and many other industrial companies that purchase large amounts of steel. While we acknowledge this headwind, Manitowoc s new management team has significantly improved the company s profitability and balance sheet amid a challenging market environment for cranes. Manitowoc reported quarterly results in February that included a second consecutive quarter of year-over-year growth. Its balance sheet also improved as net debt declined on a year-over-year basis. Spirit Airlines, a leading low-cost carrier in the United States, saw its share price negatively impacted by an increased level of pricing pressure in certain regions of the country from incumbent legacy airlines, such as United Airlines (not a fund holding). The pricing environment changed meaningfully from the otherwise supportive environment that existed throughout most of the prior 18 months. Mueller Industries is a producer of residential and non-residential building products produced primarily from brass and copper. Despite a favorable rebound in copper prices, which is beneficial for Mueller s pricing, fourth-quarter results released in February were weaker than consensus expectations due in part to a foundry outage. Portfolio Positioning At quarter-end, the fund s largest sector concentration was financials, followed by industrials and information technology. Its five largest portfolio holdings were AAR (industrials), First Horizon National (financials), Chemical Financial (financials), Old Republic International (financials) and Columbia Banking System (financials). The fund initiated several positions during the period under review, including a producer and distributor of specialty metals. The company continues to increase profitability in its core business, while commercial aerospace demand is improving. We also increased our positions in a manufacturer of road paving and construction-related equipment and an aerospace and defense component supplier, among others. The fund exited a few positions during the period, most notably Rowan Companies, an offshore oil and gas driller. We exited the position as industry conditions remain challenging, with little visibility on when demand will significantly improve. We also closed out our positions in Gerresheimer, Enersys and NetScout Systems. franklintempleton.com 2

3 Outlook & Strategy Despite recent market volatility and escalating concerns of a trade war, general expectations for US economic growth in 2018 among economists remain positive. While job growth has moderated, the trend remains at a level that economists believe will result in further tightening of the labor markets. At the same time, other economic activity indicators have continued to point to solid momentum. Economic conditions, along with the potential benefits of lower corporate taxes and the repatriation of foreign earnings, have led to an upbeat outlook for corporate earnings. Inflation has remained subdued in the United States; however, economic conditions, particularly tighter labor markets, are raising expectations of gradual increases in price levels. The prospect of healthy economic growth and rising inflation is providing the Fed with justification to move away from its loose monetary policies. Positive economic conditions may also lead to gradual reductions in monetary stimulus by other major central banks. Prior to February, the positive economic and corporate backdrop had been a dominant driver of US equity market gains. Overall equity market valuations (e.g., price-to-earnings, price-to-book or price-to-sales) were also elevated relative to most historical benchmarks. At the same time, performance among individual stocks varied widely, providing us with select opportunities. The February spike in the Chicago Board Options Exchange Volatility Index (VIX) was a useful reminder that equity markets are vulnerable to sudden pullbacks. The announcement of tariffs by the United States and counter-tariffs by certain trading partners injected more volatility into financial markets and some uncertainty into the global economic outlook. While we do not make top-down portfolio positioning decisions, it is important to point out that successful investing can require patience and a conviction in bottom-up fundamental analysis. An essential element of value investing is confidence that its inherently contrarian nature should yield positive outcomes over time. We believe small-cap companies are likely to benefit meaningfully from a lower corporate tax rate. Smaller public companies typically earn more income within the United States, which means they generally pay a higher effective tax rate than large multinationals. However, an increase in corporate bond spreads from historically low levels could be a possible headwind to small-cap stocks. In our view, bond spreads eventually will widen if the Fed continues raising short-term interest rates and shrinking the size of its balance sheet. At this time, we believe attractive investment opportunities within US equities are more generally found in cyclical sectors, such as industrials, materials, energy and certain segments of the consumer discretionary sector. We also expect technology disruption to continue (e.g., the rapid market share shift to online retailing and away from traditional brick- and mortar-dominated retailers that are often labeled as value stocks). 6. 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. Portfolio Characteristics 7,8 Portfolio Russell 2000 Value Index Price to Earnings (12 Month Trailing) 18.44x 17.36x Price to Book Value 1.81x 1.51x Price to Cash Flow 12.73x 8.27x Market Capitalization (Millions in USD) 3,231 2, The portfolio characteristics listed are based on the fund s underlying holdings, and do not necessarily reflect the fund s characteristics. Due to data limitations all equity holdings are assumed to be the primary equity issue (usually the ordinary or common shares) of each security s issuing company. This methodology may cause small differences between the portfolio s reported characteristics and the portfolio s actual characteristics. In practice, Franklin Templeton s portfolio managers invest in the class or type of security which they believe is most appropriate at the time of purchase. The market capitalization figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. Source: Factset. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 8. 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 3

4 Portfolio Diversification Top Ten Holdings 9 Percent of Total Top Holdings Sector % AAR CORP Capital Goods 3.17 FIRST HORIZON Banks 2.90 NATIONAL CORP CHEMICAL FINANCIAL Banks 2.85 CORP OLD REPUBLIC Insurance 2.80 INTERNATIONAL CORP COLUMBIA BANKING Banks 2.66 SYSTEM INC THE HANOVER Insurance 2.50 INSURANCE GROUP INC HUNTING PLC Energy 2.33 MCGRATH RENTCORP Commercial & 2.31 Professional Services ZEBRA Technology Hardware & 2.28 TECHNOLOGIES CORP Equipment ENERGEN CORP Energy 2.13 Sector Weightings vs. Russell 2000 Value Index 10,11 Percent of Total Financials Industrials Information Technology Materials Energy Consumer Discretionary Real Estate Consumer Staples Utilities Health Care Telecommunication Services Cash & Cash Equivalents % 5% 10% 15% 20% 25% 30% 35% Franklin Small Cap Value Fund Russell 2000 Value Index Largest Sector Contributors vs. Russell 2000 Value Index 12 Total Sector Effect (%) Energy 0.86 Information Technology 0.85 Financials 0.24 Utilities 0.19 Real Estate 0.16 Contributors/detractors data shown is for the period from 01/01/2018 to 03/31/2018. Largest Sector Detractors vs. Russell 2000 Value Index 13 Total Sector Effect (%) Industrials Consumer Discretionary Health Care Consumer Staples 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. 10. 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. 11. 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. Past performance is not an indicator or a guarantee of future performance. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. Source: FactSet. Important data provider notices and terms available at Total Effect represents the excess return by sector as compared to the index. Performance attribution is calculated in the base currency of the fund. franklintempleton.com 4

5 Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Standard Deviation (%) Tracking Error (%) Information Ratio 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 Process INITIAL SCREEN INDIVIDUAL COMPANY ANALYSIS ACCUMULATE SUBJECT TO PRICE CONSTRUCT AND MONITOR PORTFOLIO Screen initial universe of 8,000 stocks to search for small-cap value companies with low long-term debt/equity ratio and one or more ratios such as: Low price/earnings ratio Low price/book ratio Low price/cash flow ratio Identify companies with: Strong balance sheets Effective, shareholderfriendly management Viable products or services Valuable customer franchises and other intangibles Ownership of valuable trademarks, trade names, distribution networks Other special factors that suggest a company may be a takeover or turnaround candidate Set target sell price Our value discipline makes us price-sensitive buyers Our ability to accumulate a full position is often subject to opportunistic purchases during times of market volatility Monitor fundamentals Review portfolio holdings Review target price Continual screening of stock universe and monitoring of current portfolio Investment Team Portfolio Manager Years with Firm Years Experience Steven Raineri, Portfolio Manager/Research Analyst Christopher Meeker, CFA, Portfolio Manager/Research Analyst 5 14 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%. 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. Market Capitalization: A determination of a company s value, calculated by multiplying the total number of company stock shares outstanding by the price per share. Market capitalization is expressed in millions of USD. 14. Beta, Information Ratio and Tracking Error information are measured against the Russell 2000 Value Index. 15. 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 5

6 Price to Book Value: The price per share of a stock divided by its book value (i.e., net worth) per share. For a portfolio, the value represents a weighted average of the stocks it holds. Price to Cash Flow: Supplements price/earnings ratio as a measure of relative value for a stock. For a portfolio, the value represents a weighted average of the stocks it holds. Price to Earnings (12-mo Trailing): The share price of a stock, divided by its per-share earnings over the past year. For a portfolio, the value represents a weighted average of the stocks it holds. 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 6

7 What Are The Risks? All investments involve risks, including possible loss of principal. The fund s investments in smaller-company stocks carry special risks as such stocks have historically exhibited greater price volatility than larger-company stocks, particularly over the short term. Additionally, smaller companies often have relatively small revenues, limited product lines and a small market share. In addition, the fund may invest up to 25% of its total assets in foreign securities, which involve special risks, including currency fluctuations and economic and political uncertainty. These and other risks are detailed 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. Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russel is a trademark of Frank Russell Company. Important data provider notices and terms available at: 3. Effective 12/31/1996, 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. 682 PP 03/18