Franklin Emerging Market Debt Opportunities Fund Advisor Class Unconstrained Fixed Income Product Profile Product Details Fund Assets $554,236,508.79 Fund Inception Date 05/24/2006 Number of Securities 103 Including Cash NASDAQ Symbol FEMDX Investment Style Unconstrained Benchmark JP Morgan EMBI Global Diversified (USD Based) ;JP Morgan GBI- EM Broad Diversified ;BofA Merrill Lynch Emerging Market Corporate Plus (USD Hedged) Morningstar Category Emerging Markets Bond Dividend Frequency Annually Fund Description The fund seeks high total return by investing mainly in debt obligations of sovereign and subsovereign issuers located in emerging market countries 1. Overview The Fund will normally invest at least 80% of its net assets in debt securities of emerging market countries. The Fund invests in debt securities issued by sovereign and subsovereign government entities, including securities issued by political subdivisions, local authorities, government agencies, government owned, controlled, sponsored or guaranteed corporations, and supranationals located in emerging market countries. Although the investment manager tends to focus on these types of securities, securities issued by corporate entities that are controlled (i.e., more than 50% owned) by a sovereign entity, and corporate emerging markets debt, are also considered suitable investments. The Fund may invest up to 100% of its assets in high yield, lower quality debt securities ( junk bonds ). Performance Data Average Annual Total Returns (USD %) 2 Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs (05/24/2006) Advisor Class 2.40 2.40 9.53 8.42 4.10 6.83 7.41 JP Morgan EMBI -1.74-1.74 4.30 5.78 4.69 7.04 7.32 Global Diversified (USD Based) JP Morgan GBI-EM 4.19 4.19 11.97 5.38 0.45 3.80 5.74 Broad Diversified BofA Merrill Lynch -0.98-0.98 3.11 4.77 3.76 6.46 6.31 Emerging Market Corporate Plus (USD Hedged) Total Annual Operating Expenses With Waiver: 1.01%Without Waiver: 1.1% 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 your Franklin Templeton institutional marketing representative at 1.800.321.8563 or visit ftinstitutional.com for the most recent month-end performance. The fund has an expense reduction and a fee waiver associated with any investments it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 11/30/2018. Fund investment results reflect the expense reduction and fee waiver; without these reductions, the results would have been lower. 1. Emerging market countries generally include those considered to be developing by the World Bank. These countries typically are located in the Asia-Pacific region, Eastern Europe, Central and South America, and Africa. In addition, countries that have restructured their external or local debt during the past 10 years or currently have restructured external or local debt outstanding may also be considered to be emerging market countries. 2. Periods shorter than one year are shown as cumulative total returns. Not FDIC Insured May Lose Value No Bank Guarantee
20% 10% 0% -10% 11.97 9.53 8.42 6.83 7.41 2.40 2.40 4.30 5.78 7.04 7.32 4.19 4.19 5.38 4.10 4.69 3.80 5.74 3.11 4.77 6.46 6.31 3.76 0.45-1.74-0.98-1.74-0.98 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception Advisor Class JP Morgan EMBI Global Diversified (USD Based) JP Morgan GBI-EM Broad Diversified BofA Merrill Lynch Emerging Market Corporate Plus (USD Hedged) Calendar Year Returns (USD %) 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 Advisor Class 11.67 12.44-2.38-0.83 1.06 17.15 1.58 13.79 57.69-27.63 JP Morgan EMBI Global Diversified (USD Based) 10.26 10.15 1.18 7.43-5.25 17.44 7.35 12.24 29.82-12.03 Portfolio Manager Insight Market Review Emerging-market (EM) hard-currency government bonds suffered a 1.74% fall during the quarter, as per the JP Morgan Emerging Markets Bond Global Diversified (EMBIGD). Ten-year US Treasury yields rose 33 basis points (bps), to 2.74% at the end of March. In addition, the spread-toworst of US dollar-denominated EM sovereign debt over US Treasuries widened by some 18 bps. EM hard-currency corporate bonds fell by 0.98%, as per the ICE BofAML Emerging Markets Corporate Plus, hedged into US dollars. EM local-currency government bonds returned 4.19% for the quarter, unhedged in US-dollar terms, as per the JP Morgan Government Bond Emerging Markets (GBI-EM) Broad Diversified. EM local-currency bond yields fell during the quarter, and EM currencies mostly appreciated against the US dollar. Performance Review The strategy s position in South African local-currency bonds was the main contributor to its performance during the quarter. South Africa s Deputy President Cyril Ramaphosa became president in February 2018, and is generally considered to stand for prudent government, ethical leadership and a constructive attitude toward business. Since he became president, South Africa s central bank has raised its forecast of the country s economic growth to 1.9% for 2018. In addition, local interest rates moved lower after South Africa s Reserve Bank cut its policy rate by 25 bps in March, as headline inflation fell to its lowest level in three years. The strategy s position in Venezuelan oil warrants also contributed to performance. Venezuela defaulted on a number of bonds in late 2017, but these warrants were one of the last instruments to be serviced. Payments on these warrants are connected to oil prices, which rose during the quarter after Saudi Arabia announced that it was working on a long-term oil production agreement with Russia. This means that the semi-annual payment due in April is certain to be triggered, although it remains unclear whether payment will be made. The strategy s position in Uruguayan local-currency bonds was the main detractor from returns. These bonds rallied in 2017 but have performed poorly since the beginning of this year, when Uruguay s quarterly debt report highlighted the need for additional borrowing. Uruguay s government is estimated to need around US$2.7 billion in financing in 2018, which may include a further extension of the country s nominal-peso curve and the swapping of existing bonds for longer-duration debt. Outlook & Strategy EM debt produced strong returns in 2017. As a result, 2018 started with fairly stretched valuations, despite the continued strengthening of emerging markets economic fundamentals. The global economy s improving health has sparked concerns that long-dormant inflationary pressures will finally emerge. Some investors fear that higher inflation may force central banks to reduce their bond-buying programs and raise interest rates more aggressively than expected. These fears, in turn, led to a spike in volatility at the start of February, followed by rising bond yields in developed markets. Emerging markets, by contrast, have experienced only a marginal correction since early February, partly due to some investor outflows from the asset class. Politics will continue to be an important hurdle for emerging markets this year, with elections due in Mexico, Colombia, Brazil and Venezuela, among others. In addition, US policies and idiosyncratic stories (such as the talks to renegotiate the North American Free Trade Agreement) are likely to remain dominant. Portfolio Characteristics 3 JP Morgan EMBI Global Diversified (USD Portfolio Based) Number of Securities Including Cash 103 673 Average Duration 4.35 Yrs 6.79 Yrs Average Weighted Maturity 7.35 Yrs 10.93 Yrs Duration to Worst 4.57 Yrs 6.78 Yrs ftinstitutional.com 2
Portfolio Diversification Geographic Allocation 4,5 MIDDLE EAST / AFRICA 37.99 LATIN AMERICA 30.55 EASTERN EUROPE 16.20 FAR EAST / ASIA 10.26 RESIDUAL 3.46 FUNDS 0.14 SUPRANATIONAL 1.39 0% 10% 20% 30% 40% 50% Sector Allocation 4,6 Currency Allocation 4 US Dollar 72.24 South African Rand Colombian Peso Mexican Peso Uruguayan Peso Turkish Lira Ghanaian Cedi New Kenyan Shilling Egyptian Pound Peruvian Nuevo Sol Dominican Peso Kazakhstani Tenge Georgian Lari Ugandan Shilling Brazilian Real Azerbaijani Manat Russian Ruble 3.94 3.57 3.43 3.26 2.53 2.29 1.71 1.22 1.12 1.05 1.02 0.96 0.56 0.47 0.37 0.29 Japanese Yen -0.03-20% 0% 20% 40% 60% 80% Sovereign 58.30 Quasi-Sovereign 20.38 Corporates 17.71 Residual 3.47 Funds 0.14 0% 10% 20% 30% 40% 50% 60% 70% Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) Franklin Emerging Market Debt Opportunities Fund 6.22 6.28 10.62 9.88 JP Morgan EMBI Global Diversified (USD Based) 5.24 6.15 8.88 8.33 Tracking Error (%) 3.68 3.77 6.24 5.90 Information Ratio 8 0.72-0.16-0.03 0.01 Sharpe Ratio Franklin Emerging Market Debt Opportunities Fund 1.27 0.60 0.62 0.66 JP Morgan EMBI Global Diversified (USD Based) 1.00 0.71 0.76 0.77 Investment Process Franklin s Emerging Market Debt Opportunities investment process can be summarized in three integral steps country allocation, currency allocation and issuer selection. 5,6. The Funds refers to a private limited partnership fund focused on global distressed debt. 7. Information Ratio and Tracking Error information are displayed for the product versus the JP Morgan EMBI Global Diversified (USD Based). ftinstitutional.com 3
Ongoing Monitoring and Risk Management 1. Country Allocation 2. Currency Allocation 3. Issuer Selection Countries are ranked into three risk categories (high/medium/low) Yield vs. Fundamentals Improving Credit Potential to Help the Strategy Meet its Return Target Hard vs. Local Currency Assessment Yield vs. Risk Volatility Liquidity Relative Pricing Sovereign Debt Emerging Market Credit (Sovereign, Quasi-Sovereign, Corporate) Local Asset Management Corporate Credit Global Macro Emerging Market Equity Investment Team Portfolio Manager Years with Firm Years Experience William Ledward 21 33 Nicholas Hardingham, CFA 15 18 Stephanie Marjan Ouwendijk, CFA 3 10 Additional Resources Corporates - High Yield Corporates - Investment Grade Fixed Income Policy Committee Global Sovereign/EMD Local Asset Management Templeton Emerging Markets Equity Product Managers Years with Firm Years Experience Alberto Landi 9 9 Stuart Lingard 6 20 Glossary Term 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. 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%. Duration to Worst: Duration of a bond computed using the bond s nearest call date or maturity, whichever comes first. This measure ignores future cash flow fluctuations due to embedded optionality. 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. ftinstitutional.com 4
What Are The Risks? All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing including currency volatility, economic instability, and social and political developments of countries where the fund invests. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. The risks associated with higher yielding, lower rated securities include higher risk of default and loss of principal. In addition, interest rate movements will affect the fund s share price and yield. Prices of debt securities generally move in the opposite direction of interest rates. Thus, as prices of debt securities in the fund adjust to a rise in interest rates, the fund s share price may decline. The fund is actively managed but there is no guarantee that the manager s investment decisions will produce the desired results. These and other risks are detailed in the fund s prospectus. Important Legal Information 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 publication date 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. Source: FactSet. JP Morgan EMBI Global Diversified (USD Based) tracks total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities. The secondary benchmark, JP Morgan GBI-EM Broad Diversified, includes securities denominated in local currencies. The third benchmark was changed to The BofA Merrill Lynch Emerging Markets Corporate Plus (100% Hedged into USD). This benchmark is a capitalization weighted fixed income index hedged to the U.S. dollar and comprised of U.S. dollar and euro denominated emerging markets non-sovereign debt publicly issued within the major domestic and European markets. es are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 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, call Franklin Templeton at (800) 321-8563 or visit ftinstitutional.com. Please carefully read a prospectus before you invest or send money. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. The index data referenced herein is the property of Merrill Lynch, Pierce, Fenner & Smith Incorporated ( BofAML ) and/or its licensors and has been licensed for use by Franklin Templeton. BofAML and its licensors accept no liability in connection with this use. See www.franklintempletondatasources.com for a full copy of the Disclaimer. Important data provider notices and terms available at www.franklintempletondatasources.com. 3. Average Duration, Average Weighted Maturity and Duration to Worst reflect certain derivatives held in Portfolio (or their underlying reference assets). 4. 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. 8. 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). 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. Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 Tel: (800) 321-8563 ftinstitutional.com 2018 Franklin Templeton Investments. All rights reserved.