Templeton Global Smaller Companies Fund

Templeton Global Smaller Companies Fund Product Profile Product Details 1 Fund Assets $313,983,910.78 Fund Inception Date 01/03/1989 Number of Issuers 93 Base Currency Morningstar Category Distribution Frequency CAD Global Small/Mid Cap Equity Annually Fund Codes 2 Series CAD USD Series A Front TML707 TML806 Series A DSC TML737 TML906 Series A Low Load TML694 TML695 Series F TML747 TML754 Series F ADM TML5022 TML5044 Series I TML787 TML798 Series O TML169 TML178 Series PF TML3918 TML3919 Series PF ADM TML5093 TML5115 Corporate Class CAD USD Series A Front TML330 TML332 Series A DSC TML331 TML333 Series A Low Load TML608 TML609 Series F TML334 TML335 Series I TML336 TML337 Series O TML338 TML339 Series I and V closed to new investors as of November 22, 2016. Beginning in January 2017, investors switching between Corporate Class funds will trigger a capital gain or loss at the time of the switch due to certain changes in the income tax laws made by the federal government in 2016. Fund Description The fund seeks long-term capital appreciation by investing primarily in securities of smaller companies around the world. Smaller companies are those similar in size to the companies in the MSCI All Country World (ACWI) Small Cap Index, at the time of initial purchase. Performance Data 3 Average Annual Total Returns 4 (%) Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs (01/03/1989) Series A -0.11 0.98 9.33 7.21 9.22 6.60 6.32 8.14 Management Expense Ratio (as of 12/31/2017 incl. HST) 2.62% The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Please call Franklin Templeton Client Services at 1.800.387.0830 or visit www.franklintempleton.ca for the most recent month-end performance. 20% 10% 0% -10% Series A -0.11 9.33 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Portfolio Manager Insight 5 7.21 Calendar Year Returns (%) 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 Series A 16.29 7.50 7.18-32.65 11.53-22.86 18.10 51.18-38.79 Market Review Global equity markets collectively closed 2018 s second quarter with a slight gain in US-dollar terms. Intensifying trade tensions and their potential to slow global economic growth weighed on sentiment. Concerns also arose that the synchronised global growth story might be coming to an end, as the US economy looked resilient, while pockets of Europe, Asia and Latin America faced various challenges. Developed-market stocks, as measured by MSCI indexes, advanced ahead of a gauge of global equities and outperformed their emerging- and frontier-market peers, which generally suffered fairly steep declines. In developed markets, the US economy appears to have bounced back from modest first-quarter gross domestic product (GDP) growth as spending by consumers, businesses and the government has gained momentum. Amidst this backdrop, the US Federal Reserve lifted its 2018 GDP guidance in June when it raised interest rates for the second time this year. Also in June, the European Central 1. All holdings are subject to change. Holdings of the same issuers have been combined. 2. ADM refers to the Investment Advisory Services Fee purchase option for series F,FT, PF, PF(Hedged), and PFT. Please see the simplified prospectus for further details. 3. The fund offers other series subject to different fees and expenses, which will affect their performance. 4. Periods shorter than one year are shown as cumulative total returns. 5. 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. 9.22 6.60 8.14

Bank announced it intends to end its quantitative easing programme by year-end and expects to keep interest rates on hold at least through the summer of 2019. Elsewhere in Europe, the United Kingdom s unemployment rate for the three months through April remained at a 42-year low. In Asia, Japan s first-quarter 2018 GDP growth was revised down to a quarterly drop, shrinking for the first time in two years. Many observers noted a general aversion to emerging markets amidst a strengthening US dollar. On a country level, China s first-quarter 2018 GDP rose year-on-year in line with previous quarters and consensus expectations; meanwhile, the quarter-on-quarter reading was slightly below expectations, and marked the slowest pace of growth in two years. South Korea s first-quarter GDP rose quarter-on-quarter following a contraction in the previous period. India s GDP for the January March quarter grew at the fastest pace in seven quarters on stronger manufacturing and investments. Brazil s first-quarter GDP grew year-on-year, the fourth consecutive positive result. Mexico s GDP growth in the first quarter continued moderating in annual terms, but accelerated quarter-on-quarter to the highest figure since 2016. Performance Review The fund underperformed relative to its benchmark index in the second quarter. Stock selection in the consumer discretionary and materials sectors weighed on relative results. In the industrials sector stock selection and an overweight allocation hurt relative performance. CommScope, M.Dias Branco and Camil Alimentos were among the top 10 relative detractors. Shares of US telecommunications equipment firm CommScope declined after pricing pressures negatively impacted the company s margins. While aggressive pricing from US telecom carriers embarking on large-scale projects has remained a threat to CommScope s profitability, the resulting single-digit hit to near-term free cash flow guidance did not justify the significant share-price selloff, in our view. M. Dias Branco, Brazil s market leader in cookies and crackers was also a significant relative detractor. Despite short-term underperformance, we believe the company s market-leading brands and the significant competitive advantages it has developed by vertically integrating and slowly developing distribution across Brazil will lead to strong performance over our long-term investment horizon. Also based in Brazil, packaged grains and food products company Camil Alimentos declined in value. We believe the company has a strong growth runway based on its premium pricing and market leading position within the majority of its brands. Turning to contributors, stock selection in the consumer staples sector boosted relative results. At the fund level leading relative contributors included USbased Freshpet and Boston Beer Company. Freshpet sells fresh, protein-based natural pet food and treats in their own branded refrigerators in thousands of stores throughout the United States. Solid quarterly earnings and increased merger and acquisition activity in the pet food space has fueled the company s share price. Shares of Craft brewing company Boston Beer performed well after a strong earnings report was released in April. The company established the craft beer industry in the United States, and is the market leader in craft beer, hard cider, and fermented malt beverages. Geographically, stock selection and an underweight in the United States dampened relative performance. Stock selection and an overweight allocation in Asia and Europe also hurt relative results. At the country level, Germany, India, Canada, Columbia and Sweden supported relative performance. Outlook & Strategy Surveying the current global investment environment, a number of situations appear incongruous and unsustainable to us. First, the US-led economic cycle is now the second-longest of the post-war era, with the world s largest economy nearing full employment and peak profitability. This strikes us as an odd moment to unleash large-scale fiscal stimulus, especially if it needs to be deficit-financed at a time of waning demand for Treasury debt. Second, US stocks are near their highest valuation levels in history, at least based on the metrics that are most correlated to future long-term returns. This seems a strange time to rush indiscriminately into US equities, yet data confirms that 2017 saw record inflows into US-focused exchange-traded funds. Third, corporate debt-to-gdp is back near previous peaks, while the government debt-to-gdp ratio of the Group of Seven countries is near the highest level since World War II. This seems a perilous time to increase borrowing costs, but nevertheless rates have been rising. Our broader point is that risks appear elevated at this mature stage in the cycle, with volatility resurfacing in an environment of full valuations, rising interest rates and still fragile economic growth. We would not want to own the leaders of the last cycle in this environment, and believe that the inevitable market transition come when it may could significantly bolster the case for active value investing. In keeping with our time-tested value discipline, recent quarters have seen us reducing exposure to expensive sectors like internet technology, consumer discretionary and US banks and reinvesting proceeds into beleaguered sectors like health care, telecommunications and select energy stocks. The aim of a long-term, contrarian investment framework is to spot such opportunities and get there before the crowds arrive to erode the return potential. In this environment of impending transition, we have continued to find what we consider the best long-term opportunities amongst unloved and overlooked stocks. Portfolio Characteristics 6 Portfolio MSCI AC World Small Cap Index Price to Earnings (12 Month Trailing) 18.77x 25.15x Price to Book Value 2.02x 1.93x Price to Cash Flow 12.17x 12.35x Market Capitalization (Millions in CAD) 3,956 3,821 6. 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. franklintempleton.ca 2

Portfolio Diversification Top Ten Holdings 7 Top Holdings Sector Country % THULE GROUP AB/THE Consumer Durables & Apparel Sweden 2.03 HILLENBRAND INC Capital Goods United States 2.01 COLUMBIA SPORTSWEAR CO Consumer Durables & Apparel United States 2.00 ALLIANCEBERNSTEIN HOLDING LP Diversified Financials United States 1.98 AMER SPORTS OYJ Consumer Durables & Apparel Finland 1.98 KOBAYASHI PHARMACEUTICAL CO Household & Personal Products Japan 1.93 LTD TECHNOGYM SPA Consumer Durables & Apparel Italy 1.92 SIMPSON MANUFACTURING CO INC Capital Goods United States 1.90 DEWAN HOUSING FINANCE CORP Banks India 1.74 LTD INTERPUMP GROUP SPA Capital Goods Italy 1.73 Geographic Weightings vs. MSCI All Country World Small Cap Index 8,9 NORTH AMERICA EUROPE ASIA L. AMERICA/CARIBBEAN CASH & CASH EQUIVALENTS 0.95 3.23 5.25 Templeton Global Smaller Companies Fund MSCI All Country World Small Cap Index 20.30 20.04 24.05 29.57 37.90 54.64 0% 25% 50% 75% Sector Weightings vs. MSCI All Country World Small Cap Index 10,11 Industrials Consumer Discretionary Financials Information Technology Consumer Staples Materials Health Care Real Estate Energy Utilities Telecommunication Services Cash & Cash Equivalents 0.83 Templeton Global Smaller Companies Fund MSCI All Country World Small Cap Index 4.98 2.67 4.41 2.84 3.80 3.56 5.25 8.07 7.40 8.11 10.53 10.76 10.31 13.90 14.38 13.57 13.84 16.44 22.24 22.10 0% 5% 10% 15% 20% 25% 7. 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 securities identified do not represent the fund s entire holdings and in the aggregate may represent only a small percentage of such holdings. There is no assurance that securities purchased will remain in the fund, or that securities sold will not be repurchased. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise be included. 8,10. 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. 9,11. 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. franklintempleton.ca 3

Largest Sector Contributors vs. MSCI All Country World Small Cap Index 12 (%) Consumer Staples 0.69 Telecommunication Services 0.02 Utilities 0.01 Contributors/detractors data shown is for the period from 04/01/2018 to 06/30/2018. Largest Sector Detractors vs. MSCI All Country World Small Cap Index 13 (%) Consumer Discretionary -0.95 Materials -0.90 Industrials -0.76 Health Care -0.56 Information Technology -0.28 Asset Allocation 14 Equity 94.75 Cash & Cash Equivalents 5.25 0% 20% 40% 60% 80% 100% 120% Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) 10.09 9.12 15.81 13.57 Tracking Error (%) 3.59 3.99 8.34 9.61 Information Ratio -1.26-1.77-0.44 0.03 Beta 0.98 0.88 1.17 0.78 Sharpe Ratio 0.65 0.93 0.36 0.31 The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Please call Franklin Templeton Client Services at 1.800.387.0830 or visit www.franklintempleton.ca for the most recent month-end performance. Investment Philosophy Templeton utilises a disciplined, consistent approach based on three timeless principles of investing: Value Patience Bottom-up stock picking Our flexible approach is applied within a disciplined framework and seeks to identify companies trading at large discounts to their business value. Our long-term focus gives us a framework to take advantage of price volatility to reveal potential longterm investment opportunities. Patience allows for potential long-term value recognition. Our portfolio management process seeks to buy pessimism and sell optimism. We build portfolios spanning regions and sectors made up of securities identified through this process. 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 www.franklintempletondatasources.com. Total Effect represents the excess return by sector as compared to the index. Performance attribution is calculated in the base currency of the fund. 14. 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. 15. Beta, Information Ratio and Tracking Error information are measured against the Custom Templeton Global Smaller Companies Benchmark. 16. 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.ca 4

Investment Process 17 1 2 3 4 5 Identify Potential Bargains Experienced analysts Focus on global industry sectors Quantitative and qualitative assessment Identify material ESG issues In-Depth Fundamental Analysis Five-year financial forecasts Management/supplier/ competitive evaluation Upside/downside return quantification Recommendation of Bargain List candidates Research Team Evaluation Presentation of investment thesis Investment debate and critique: Devil s Advocate ESG Devil s Advocate Director of research approval Bottom-Up Portfolio Construction Investment parameters Industry and sector framework Build and diversify portfolio Long-term approach: 20% historical turnover TEMPLETON S BOTTOM-UP STOCK SELECTION PROCESS Portfolio Monitoring and Risk Management Ongoing valuation analysis Ongoing ESG monitoring Disciplined sell methodology Weekly peer review and risk analytics 17. Historical turnover is based on Templeton s experience as a Firm, over a five-year period as of most recent quarter end. The turnover is a byproduct of Templeton s long-term approach to managing portfolios, but various factors, such as a portfolio s specific investment guidelines and market or economic conditions may cause actual portfolio turnover to vary. Investment Team Portfolio Manager Years with Firm Years Experience Harlan Hodes, EVP, Portfolio Manager, Research Analyst 16 18 David Tuttle, CFA, VP, Portfolio Manager, Research Analyst 15 13 Templeton Global Equity Team Number of Members Average Years Experience Portfolio Managers/Analysts 27 23 Research Analysts 11 12 Additional Resources Global Portfolio Compliance Global Research Library Global Trading Platform Investment Risk Management Group Group Junior Research Analysts Research Technology Group 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 CAD. 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.ca 5

Important Legal Information CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at: www.franklintempletondatasources.com Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Franklin Templeton Investments Canada is a business name used by Franklin Templeton Investments Corp. Franklin Templeton Investments Canada 200 King Street West, Suite 1500 Toronto, ON M5H 3T4 Tel: 800.387.0830 Fax: 866.850.8241 franklintempleton.ca 2018 Franklin Templeton Investments. All rights reserved. 707 PPE 06/18