Franklin NextStep Funds

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1 Franklin NextStep Funds June 30, 2016 MONTHLY PORTFOLIO UPDATE The Simple Way to Invest: Franklin NextStep Funds Simplicity All-in-one portfolios matched to three levels of risk. Diversification A broad mix of funds invested across fund managers, asset classes and countries. Expertise Professionally managed to navigate the ups and downs of the market. Performance Highlights Franklin NextStep Conservative and Growth Funds underperformed their benchmark indexes for the second quarter of Franklin NextStep Moderate Fund performed in line with its benchmark index. The funds equity underweights benefited relative results for Franklin NextStep Moderate Fund, but detracted from relative returns for Franklin NextStep Conservative and Growth Funds. On a regional basis, a modest overweight in European ex-united Kingdom equities curbed relative performance. In contrast, an underweight in Japan slightly benefited relative results. Fund selection for equities contributed to performance relative to the funds respective benchmark indexes, largely due to Delaware Value Fund. Conversely, among the underlying stock funds that detracted from relative results were Franklin Focused Core Equity Fund and Columbia European Equity Fund. In fixed income, an asset class underweight lifted relative performance. Delaware Corporate Bond Fund and, for Franklin NextStep Conservative and Moderate Funds, Franklin Total Return Fund benefited relative returns. In contrast, Templeton Global Total Return Fund weighed on relative performance. The funds held some exposure to cash, which weighed on relative returns. We favored hedge funds, which have historically had strong, positive recoveries following drawdown periods. Off-benchmark exposure there slightly helped relative returns for Franklin NextStep Moderate and Growth Funds. Outlook & Strategy We downgraded our view on eurozone equities to neutral following the UK s European Union referendum. From our perspective, corporate fundamentals and valuations provided the strongest case for eurozone equities. However, we believe Brexit will most likely upstage recent economic data. Low yields for developed-market government bonds offered little value potential, in our opinion, and rising inflation trends may provide a catalyst for higher interest rates. We are constructive on US Treasuries, but negative on non-us government bonds. US inflation-protected assets appeared attractive to us and were held in Franklin NextStep Conservative and Moderate Funds. From our perspective, the US Treasury market has been excessively pricing in sluggish growth and a conservative path of interest-rate hikes in the medium term. Three Portfolios Aligned to Relative Risk/Return Levels Franklin NextStep Conservative Fund Franklin NextStep Moderate Fund Franklin NextStep Growth Fund May be best for investors seeking to reduce market volatility or who have a shorter time period to invest. May be best for investors seeking longterm growth and a balanced approach to total return and risk. May be best for investors who want strong longterm return potential and are more comfortable with a higher level of volatility. LOWER RISK AND RETURN POTENTIAL MODERATE RISK AND RETURN POTENTIAL HIGHER RISK AND RETURN POTENTIAL Stock Funds Bond Funds Alternative Investments Funds¹ Diversification does not guarantee a profit or protect against a loss. Fund allocations are provided for illustrative purposes only and the categorization of the funds as conservative, moderate and growth is relative. There is no guarantee that the Franklin NextStep Funds will be allocated in a similar manner. 1. Alternative investments include less traditional asset classes such as, real estate, commodities and hedge strategies. Performance and market movement of alternative investments do not typically follow stocks and bonds. Alternative investments may be included in Franklin NextStep Moderate Fund and Franklin NextStep Growth Fund. Not FDIC Insured May Lose Value No Bank Guarantee

2 Franklin NextStep Funds Performance June 30, 2016 Portfolio Performance Details Cumulative Performance as of 6/30/2016 Since Inception (2/5/16) 1-Month 3-Month Month End Quarter End 3/31/16 Franklin NextStep Conservative Fund - Class A Without Sales Charge 0.82% 1.70% 5.11% 5.11% With Sales Charge -5.01% -4.15% -0.93% -0.93% Franklin NextStep Moderate Fund - Class A Without Sales Charge 0.06% 1.66% 8.08% 8.08% With Sales Charge -5.71% -4.20% 1.86% 1.86% Franklin NextStep Growth Fund - Class A Without Sales Charge -0.46% 1.31% 8.31% 8.31% With Sales Charge -6.15% -4.50% 2.09% 2.09% Returns 1 MSCI All Country World S&P500 Barclays U.S. Aggregate Barclays Multiverse ex USD (USD Hedged) 1-Month -0.55% 0.26% 1.80% 1.96% 3-Month 1.19% 2.46% 2.21% 2.71% Year-to-Date 1.58% 3.84% 5.31% 6.29% 1-Year -3.17% 3.99% 6.00% 8.48% 5-Year 5.95% 12.10% 3.76% 5.50% 10-Year 4.82% 7.42% 5.13% 5.01% Maximum Sales Charges and Total Annual Operating Expenses Franklin NextStep Conservative Fund Maximum Sales Charges Total Annual Operating Expenses 2 With Waiver Without Waiver Class A 5.75% 1.10% 1.30% Franklin NextStep Moderate Fund Class A 5.75% 1.15% 1.26% Franklin NextStep Growth Fund Class A 5.75% 1.20% 1.37% Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment returns and principal values will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton at (800) DIAL BEN/(800) or visit nextstepfunds.com for the most recent month-end performance. 1. Performance figures for periods less than one year are cumulative total returns. The 1, 5 and 10-year performance numbers are average annual returns. 2. The fund has an expense reduction contractually guaranteed through at least September 30, The fund may also have a fee waiver associated with any investments it makes in a Franklin Templeton money fund, an arrangement that is contractually guaranteed through at least its current fiscal year end. Fund investment results reflect the expense reduction and fee waiver, as applicable; without these reductions, the results would have been lower. Sources for indexes: FactSet. es are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 2

3 Franklin NextStep Funds Diversification June 30, 2016 Asset Allocation Range: Target vs. Actual Adapting to Opportunities and Risks CONSERVATIVE MODERATE GROWTH Target Actual Target Actual Target Actual Stock Funds 10-30% 18.02% 45-65% 49.86% 60-80% 61.24% Bond Funds 70-90% 67.33% 35-55% 37.51% 20-40% 21.92% Alternative Investment Funds % 1.90% 0-10% 1.80% Cash and Cash Equivalents % % % Geographic Allocation Geographic Breakdown CONSERVATIVE MODERATE GROWTH United States 64.81% 55.22% 52.29% Europe 3.36% 9.01% 10.88% Japan 1.20% 3.40% 3.94% Global 13.91% 15.63% 10.86% Emerging Markets 2.08% 6.01% 6.98% Cash & Cash Equivalents 14.64% 10.74% 15.05% Portfolio holdings are subject to change. The asset class and geographic breakdown of each underlying fund is based on its predominant investments under normal market conditions. Figures shown 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. "Global" pertains to funds that fall under more than one geographic region or do not fall under one of the designated categories. Percentage may not equal 100% due to rounding. 3

4 Franklin NextStep Funds Expertise May 31, 2016 Portfolio Composition Franklin NextStep Conservative Fund Franklin NextStep Moderate Fund Franklin NextStep Growth Fund U.S. Equity Funds 11.39% 29.57% 37.57% Delaware Value Fund 5.71% 10.37% 13.17% Franklin Focused Core Equity Fund 3.42% 5.91% 7.51% Franklin Growth Opportunities Fund 1.13% 4.41% 5.61% Franklin Small Cap Growth Fund --% --% 1.89% ishares Core S&P 500 ETF 1.13% 8.87% 9.39% Global Equity Funds 6.64% 20.29% 23.67% Brookfield Global Listed Real Estate Fund --% 1.87% 1.87% Columbia European Equity Fund 1.85% 4.07% 4.91% Franklin Mutual European Fund 1.51% 3.60% 4.34% ishares Core MSCI Emerging Markets ETF --% 1.81% 1.40% ishares MSCI Eurozone ETF --% 1.35% 1.63% ishares MSCI Japan ETF 1.20% 3.40% 3.94% Van Eck Emerging Markets Fund 2.08% 4.20% 5.58% U.S. Fixed Income Funds 53.42% 25.65% 14.72% Delaware Corporate Bond Fund 13.35% 5.09% 3.69% Franklin Total Return Fund 17.68% 5.84% --% ishares 7-10 Year Treasury Bond ETF 7.98% 6.34% 7.35% ishares Core U.S. Aggregate Bond ETF 9.07% 5.85% 3.68% ishares TIPS Bond ETF 5.34% 2.54% --% Global Fixed Income Funds 13.91% 11.86% 7.20% Templeton Global Total Return Fund 7.02% 5.97% 3.27% Vanguard Total International Bond ETF 6.90% 5.88% 3.93% Alternative Investment Funds --% 1.90% 1.80% Franklin K2 Alternative Strategies Fund --% 1.90% 1.80% Cash and Cash Equivalents 14.64% 10.74% 15.05% IFT Money Market Portfolio 1 --% 10.13% 6.56% Cash (USD) 14.64% 0.61% 8.48% Fund allocations are a percentage of investments in asset categories as of the end of the period. The fund may shift allocations among asset classes at any time. The asset category of each underlying fund is based on its predominant investments under normal market conditions. Percentage may not equal 100% due to rounding. 1. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. 4

5 Franklin NextStep Funds Overview June 30, 2016 Fund Information Fund Name Share Class CUSIP # Ticker Symbol Franklin NextStep Conservative Fund A A 762 FNCAX Franklin NextStep Conservative Fund C A 754 FNCDX Franklin NextStep Conservative Fund Advisor A 119 FNCVX Franklin NextStep Moderate Fund A A 721 FNMDX Franklin NextStep Moderate Fund C A 713 FNMFX Franklin NextStep Moderate Fund Advisor A 127 FNMZX Franklin NextStep Growth Fund A A 747 FNGBX Franklin NextStep Growth Fund C A 739 FNGCX Franklin NextStep Growth Fund Advisor A 135 FNGVX Advisor Class shares are only offered to certain eligible investors as stated in the prospectus. They are offered without sales charges or Rule 12b-1 fees. About Franklin Templeton Solutions Franklin NextStep Funds are managed by the Franklin Templeton Solutions (FTS). FTS leverages the insights and investment strategies from Franklin Templeton s various investment management groups and employs both strategic and tactical asset allocation to create diversified outcome-oriented portfolios focused on risk-adjusted performance and tailored to client needs. An integrated global investment platform, FTS has assembled a team of over 80 dedicated investment professionals with more than 10 years of experience managing multi-asset and multi-style portfolios, with approximately $39 billion in assets under management as of June 30, Portfolio Management Thomas Nelson, CFA 24 years in industry, 8 years with Franklin Templeton Stephen Lingard, MBA, CFA 22 years in industry, 9 years with Franklin Templeton John Levy, CFA 10 years in industry, 10 years with Franklin Templeton Brooks Ritchey 32 years in industry, 10 years with Franklin Templeton 5

6 Franklin NextStep Funds June 30, 2016 A Few More Words About Asset Allocation While an asset allocation plan can be a valuable tool to help reduce overall volatility, all investments involve risks, including possible loss of principal. Because these funds invest in underlying funds, which may engage in a variety of investment strategies involving certain risks, the Franklin NextStep Funds are subject to those same risks. In addition, shareholders of the NextStep Funds will indirectly bear the fees and expenses of the underlying funds. The risks described herein are the principal risks of the Franklin NextStep Funds and the underlying funds. Typically, the more aggressive the investment, or the greater the potential return, the more risk involved. Generally, investors should be comfortable with some fluctuation in the value of their investments, especially over the short term. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in a fund adjust to a rise in interest rates, that fund s share price may decline. Foreign investing carries additional risks such as currency and market volatility and political or social instability; risks which are heightened in developing countries. Investments in derivatives involve costs and create economic leverage, which may result in significant volatility and cause the funds to participate in losses (as well as gains) that significantly exceed the funds initial investment. These risks are described in the funds prospectus. Investors should consult their financial advisor for help selecting the appropriate fund of funds, or fund combination, based on an evaluation of their investment objectives and risk tolerance. Important 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. Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change. 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 posting 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. Important data provider notices and terms available at CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) NextStepFunds.com 2016 Franklin Templeton Investments. All rights reserved. NS COMM 07/16