Franklin K2 Alternative Strategies Fund

Transcription

1 Franklin Templeton Investment Funds Franklin K2 Alternative Strategies Fund Alternatives Fund Profile Fund Details Inception Date 15 September 2014 Investment Style Alternatives Benchmark(s) 1 ICE BofAML US 3-Month Treasury Bill Index HFRX Global Hedge Fund Index FUND OBJECTIVE The Fund s investment goal is to seek capital appreciation with lower volatility relative to the broad equity markets. The Fund seeks to achieve its investment goal by allocating its net assets across multiple alternative strategies, including, but not limited to, some or all of the following: Long Short Equity, Relative Value, Event Driven and Global Macro. The Fund aims to achieve its investment objectives through the selection of various investment co-managers by the investment manager. Each investment co-manager will manage an underlying alternative strategy for the Fund. These underlying strategies will invest across a wide range of transferable securities, financial derivative instruments and other eligible securities. These may include, but not be limited to, equity and equity-related securities, debt securities, financial derivative instruments, and structured products or exchange-traded notes. WHY CONSIDER THIS FUND David C. Saunders Founding Managing Director Portfolio Manager By dynamically allocating among strategies and institutional alternative managers, we aim to maximize participation in up markets while seeking to reduce risks in down markets. Portfolio complement. An allocation to hedge strategies may provide an alternative source of returns while seeking to reduce risk. Diversified alternative solution. The Fund provides one-stop access to a diversified selection of institutional hedge fund managers and strategies in a daily liquid vehicle. A combination of disciplined capabilities. The investment process combines manager research with asset allocation analysis to construct a multi-manager, multi-strategy fund seeking to participate on the upside and reduce the downside. Risk management. The investment team applies extensive risk processes, systems and data to help ensure risks can be continually measured, monitored, and managed. Alternatives expertise. K2 has 20 years of hedge fund experience and a deep understanding of the hedge strategies they cover. 1. Benchmarks provided are for informational purposes only; the fund manager does not intend for the portfolio to track them. The ICE BofAML US 3-Month Treasury Bill Index is provided as an absolute return benchmark. The HFRX Global Hedge Fund Index represents a measure of a broad universe of hedge fund strategies. For Professional Client Use Only. Not for Distribution to Retail Clients.

2 INVESTMENT PHILOSOPHY & PROCESS K2 s investment philosophy is to work to grow capital by seeking to produce attractive risk-adjusted returns with lower correlation and reduced volatility compared to traditional asset classes. K2 believes that rigorous manager research, comprehensive risk management and active strategy allocation are key to a successful multi-strategy, multimanager alternatives fund. K2 aims to provide capital appreciation while seeking to reduce risks in down markets by dynamically allocating among strategies and institutional alternative managers. K2 believes holdings-level transparency is critical in identifying managers that are skilled in providing value-added performance and in managing market risks. K2 allocates the Fund s assets among various alternative investment strategies as shown above, utilizing a top-down approach, generating strategy weightings by taking into account various factors, which may include market conditions, risk factors, diversification, liquidity, transparency, and availability of various manager and other investment options. K2 allocates the Fund s assets to specific underlying managers utilizing a bottom-up approach, selecting strategies and their weighting within the Fund s portfolio by considering their risk profiles, return expectations, and their correlation to various markets and each other. The result is the Fund offers a diversified liquid alternative strategy that seeks to provide differentiated return drivers and lower volatility. The mutual fund structure provides advantages compared to traditional fund-of-hedge funds, with daily transparency to K2 fund managers, enhanced liquidity, and improved control over fund assets. Manager Research K2 s bottom-up approach is driven by our manager research process, where individual analysts, assigned by strategy type, perform comprehensive due diligence and recommend specific underlying co-managers for the Fund. K2 believes an exceptional manager will have the ability to generate positive alpha while avoiding negative beta influences and irresponsible operational risks. K2 also seeks to choose managers with the highest integrity and to understand the managers and their strategies thoroughly. Those managers that allow us to clearly monitor their return and risk profiles are desirable. How well a given manager fits in combination with others in the portfolio is also an important consideration of a potential allocation. When evaluating potential underlying managers, K2 follows a five-step process which involves discrete and independent groups: Strategy and people: K2 s research team Portfolio: K2 s portfolio construction team Risk: K2 s risk team Operational: K2 s operational due diligence team Legal: K2 s legal and compliance team These groups may work jointly and/or independently. Each of the above groups holds the power to veto the addition of a manager to the portfolio. The goal of our manager review process is to identify those managers that not only present suitable risk/return profiles to be additive to the portfolio, but possess the people, process and organizational integrity to provide the K2 team a level of comfort to invest with them. As a result, there are generally two dominant traits held by the co-managers in the Fund: a fundamental, analytical capability and a strong operational framework. In our estimation these are the necessary traits for a successful investment organization. Sourcing of Managers K2 has over 1,000 meetings per year with prospective and current managers. Our database contains information on over 3,500 managers on which we have performed some initial due diligence screening. We go on to perform comprehensive due diligence on approximately 100 For Professional Client Use Only. Not for Distribution to Retail Clients. 2

3 managers per year. Only managers that have completed the due diligence process and manage strategies that can be run in a daily liquid environment may be recommended for this Fund. Strategy Allocation K2 s quantitative and qualitative oversight of the Fund s investment program aims to allocate assets among various strategies and underlying co-managers that it believes are well-positioned to capture investment opportunities while supporting the overall investment objectives of the Fund. As part of that process, K2 incorporates a range of factors into its process when making strategy allocation decisions. Understanding the macro environment provides a framework for evaluating the relative attractiveness of strategies and managers. Examining where the primary drivers of market risk exist across global equity, fixed income, currency and commodities markets provides clarity on current market environments. This macro analysis helps identify sources of opportunity via establishing: Beta outlook Alpha cycle outlook Hedge fund strategy outlook, Short- and long-term capital market expectations Embedded within this analysis is a deep understanding of favourable and challenging environments for the four strategy types in which the Fund invests. This knowledge, paired with the result of scrutinizing how K2 managers have performed across past market cycles and where their current exposures lie, allows K2 to tilt portfolios towards those strategies and managers it feels are best positioned in the near-term. various factors, and how the portfolio might have performed in historical stress events. RISK MANAGEMENT As described above, risk management is fundamental to the Fund s portfolio construction process. K2 s risk analysis uses many modelling methodologies that vary based on the risk factors we are interested in monitoring and managing. For example, to estimate the risk extreme market events can pose, stress tests based on historical events as well as hypothetical what-if scenario events may be used during the construction and maintenance of the portfolio. When evaluating risk numbers, K2 understands the effect of model methodologies and model assumptions in all these measures. This understanding regarding the sensitivity of risk numbers to these models is an essential part of its risk management discipline. K2 coordinates and communicates its risk management oversight with the Franklin Templeton Investment Management Risk Group. K2 s risk reporting and guideline monitoring will be provided to the Investment Management Risk Group and discussed between the groups on a regular basis. The Fund has specific investment guidelines and requirements that are set forth by the board of directors of Franklin Templeton Investment Funds and is reviewed on a quarterly basis to ensure that the risk management process is adhered to. PORTFOLIO CONSTRUCTION K2 seeks to deliver attractive risk-adjusted performance. To help achieve that goal, risk management and analysis play a fundamental role in the way K2 constructs portfolios. Once both bottom-up manager research and top-down strategy allocation outlooks are developed, portfolio modelling is performed. Large concentrations of exposures and/or the high correlation of exposures to the same risk factors across the underlying strategies are significant risks to be managed. As a result, constructing and monitoring a highly diversified set of risk factor exposures that seek to mitigate concentrations across the various strategies is our primary goal. The extensive modelling of the entire portfolio at this stage ensures that the investment team has greater insight into how the portfolio is expected to behave in various market regimes and scenarios, how the portfolio could react to For Professional Client Use Only. Not for Distribution to Retail Clients. 3

4 PORTFOLIO MANAGEMENT TEAM K2 is a hedge fund solutions manager that is highly regarded as a pioneer in requiring the disclosure of portfolio holdings from its underlying strategy managers. K2 has developed an extensive set of proprietary analysis and risk modelling tools that help its investment professionals use portfolio data to blend the art and science of manager research with asset allocation to construct customized alternative investment solutions that are grounded in risk transparency. David C. Saunders Founding Managing Director, Portfolio Manager David C. Saunders, Founding Managing Director, cofounded in He was previously employed as a trader at Tucker Anthony & R. L. Day, First Boston Corp., and ABN Amro Inc. In addition, Mr. Saunders managed the trading desks at WaterStreet Capital and Tiger Management. Mr. Saunders graduated from the University of Maryland, College Park, with a B.S. degree in Business. He currently serves on the Board of Trustees for the University of Maryland Foundation (USMF); he is Chairman of the Investment Committee of the USMF. He also serves on the Boards of the Tiger Foundation, the Windham Mountain Foundation, and the U.S. Ski and Snowboard Team Foundation (USSA). Robert Christian Sr. Managing Director, Portfolio Manager Robert Christian, a senior managing director and head of investment research, joined in May From 1990 to 1995 Mr. Christian worked as a global strategist and proprietary trader at Chase Manhattan Futures Corporation. In 1995, he founded Modoc Capital focusing on short-term futures trading. In 1997 Modoc entered into a joint venture with Stonebrook Capital Management LLC as a portfolio manager and researcher. From 1998 to 2003 Mr. Christian worked at Graham Capital Management LP as a portfolio manager and researcher of quantitative based trading strategies. From 2003 to 2005 he was the Head of Macro Strategies at Julius Baer Investment Management. From September 2005 to March 2010 he worked at FRM Americas LLC where he was the Global Head of Directional Trading Strategies and portfolio advisor to numerous funds, including the award-winning FRM Sigma. Mr. Christian holds a B.A.S. in biology and economics from Stanford University (1985) and an M.B.A. in finance from Leonard N. Stern School of Business - New York University (1990). Brooks Ritchey Sr. Managing Director, Portfolio Manager Brooks Ritchey is a senior managing director and head of portfolio construction for. He is also a senior vice president and director of investment solutions for the Franklin Templeton Solutions division. In this capacity he co-chairs the FT Solutions Global Investment Committee (GIC). In these roles, he works with various teams to analyse market and macroeconomic conditions, determine tactical asset allocation tilts, and manage absolute return and risk overlay portfolios. Mr. Ritchey began his investment career in 1982 as a proprietary trader for the NYSE Specialist Firm of Conklin, Cahill &Co. Since 1987, Mr. Ritchey has successfully managed multi-asset mutual fund and hedge fund portfolios while located in New York and Paris, France during his employment with organizations including Steinhardt Partners, Citibank, Finch Asset Management, Paribas, AIG, and ING. Mr. Ritchey joined in Mr. Ritchey graduated from Franklin & Marshall College in For Professional Client Use Only. Not for Distribution to Retail Clients. 4

5 WHAT ARE THE KEY RISKS? The value of shares in the Fund and income received from it can go down as well as up and investors may not get back the full amount invested. Performance may also be affected by currency fluctuations. Currency fluctuations may affect the value of overseas investments. The Fund seeks to achieve its targeted investment objective by allocating its assets across multiple alternative strategies and by investing in a wide range of assets. Such assets and investment instruments have historically been subject to price movements due to such factors as general stock market volatility, sudden changes in interest rates, or fluctuations in commodity prices. The Fund will seek to limit volatility using hedged strategies. As a result, the performance of the Fund can fluctuate moderately over time. Credit risk: the risk of loss arising from default that may occur if an issuer fails to make principal or interest payments when due. This risk is higher if the Fund holds low-rated, non-investment-grade securities. Currency risk: the risk of loss arising from exchangerate fluctuations or due to exchange control regulations. Derivatives risk: the risk of loss in an instrument where a small change in the value of the underlying investment may have a larger impact on the value of such instrument. Derivatives may involve additional liquidity, credit and counterparty risks. Liquidity risk: the risk that arises when adverse market conditions affect the ability to sell assets when necessary. Reduced liquidity may have a negative impact on the price of the assets. Operational risk: the risk of losses resulting from errors or failures arising from the people, systems, service providers or processes upon which the Fund depends. Targeted return risk: there is no guarantee that the Fund will achieve its targeted objective. The Fund seeks to achieve its returns over a full market cycle to achieve a positive return. Capital invested in the Fund may decline in value. For full details of all of the risks applicable to this Fund, please refer to the Risk Considerations section of the Fund in the current prospectus of Franklin Templeton Investment Funds. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of the Luxembourg-domiciled SICAV. Nothing in this document should be construed as investment advice. Given the rapidly changing market environment, Franklin Templeton Investments disclaims responsibility for updating this material. Opinions expressed are the author s at publication date and they are subject to change without prior notice. Subscriptions to shares of the Fund can only be made on the basis of the current prospectus, the relevant Key Investor Information Document, accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter. The value of shares in the Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. Past performance is not an indicator or a guarantee of future performance. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, your performance may also be affected by currency fluctuations. An investment in the Fund entails risks which are described in the Fund s prospectus and the relevant Key Investor Information Document. In emerging markets, the risks can be greater than in developed markets. Investments in derivative instruments entail specific risks that may increase the risk profile of the fund and are more fully described in the Fund s prospectus and the relevant Key Investor Information Document. No shares of the Fund may be directly or indirectly offered or sold to residents of the United States of America. Shares of the Fund are not available for distribution in all jurisdictions and prospective investors should confirm availability with their local Franklin Templeton Investments representative before making any plans to invest. Any research and analysis contained in this document has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund s holding at any one time. Please consult your financial advisor before deciding to invest. A copy of the latest prospectus, the relevant Key Investor Information Document, the annual report and semi-annual report, if published thereafter can be found on our website or can be obtained, free of charge, from Franklin Templeton International Services S.à r.l. - Supervised by the Commission de Surveillance du Secteur Financier - 8A, rue Albert Borschette, L-1246 Luxembourg - Tel: Fax: Issued by Franklin Templeton International Services S.à r.l. For Professional Client Use Only. Not for Distribution to Retail Clients.DE Franklin Templeton Investments. All rights reserved.