Franklin High Yield Fund A (Mdis) USD Franklin Templeton Investment Funds Fund Manager Report High Yield Fixed Income Product Details 1 Fund Assets $1,816,584,912.58 Fund Inception Date 01/03/1996 Number of Securities 188 Including Cash Bloomberg TEMFHYI LX ISIN LU0065014192 Investment Style High Yield Benchmark Credit Suisse High Yield Index Morningstar Category USD High Yield Bond Asset Allocation 2 % Fixed Income 97.20 Cash & Cash Equivalents Equity 1.01 Fund Description The Fund aims to earn a high level of current income and seeks capital appreciation when consistent with its principal objective of high current income, by principally investing either directly or through the use of financial derivative instruments in Fixed Income debt Securities of US or non-us issuers of any credit ratings, if issued by US issuers, or, if issued by non-us issuers or unrated, their equivalent. Performance Data Performance Net of Management Fees as at 31/10/2018 (Dividends Reinvested) (%) 3,4 Since Inception 1 Mth 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs (01/03/1996) A (Mdis) USD -1.89-0.62-0.83-0.76 4.92 1.62 7.87 4.68 Credit Suisse -1.66-0.48 0.81 0.93 6.65 4.56 10.61 7.05 High Yield Index Calendar Year Returns (%) 100% 50% 0% -50% 6.19 7.03 17.70 18.39 1.86 6.51 7.53 14.25 14.71-12.12-4.90-1.32-26.37-26.17 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 3.75 5.47 12.27 14.42 54.22 42.21 A (Mdis) USD Past performance is not an indicator or a guarantee of future performance. Portfolio Manager Insight Performance Review ONE-MONTH KEY PERFORMANCE DRIVERS HELPED Security Selection Allocation Quality Duration Overweight in media Yield-curve Wireless issuers cable finance positioning Metals and mining wireline provider issuers wireless Energy issuers Overweight in utility supermarkets retail energy HURT Industrial issuers metals and mining lodging Packaging issuers transportation During the month, energy and builders were the two sectors that suffered the heaviest declines; our security selection and ratings-quality tilt in energy detracted from relative results. Our ratings-quality tilt in the metals and mining also detracted from performance, while security selection within the contributed. Our security selection and ratings-quality tilt in wireless issuers also contributed to relative results. 1. All holdings are subject to change.
Outlook & Strategy Amidst stock market volatility in October and widening spread levels, the US high-yield (HY) market held up relatively well and performed better than US equity markets overall. Similar to September, HY new-issue supply remained mutedpossible reasons include expected merger and acquisition (M&A) transactions that did not come to fruition and leveraged buyout (LBO) financings that were funnelled into the floating-rate loan market. As we have noted in the past, despite an increase in permissive or loose covenants for some HY new issues, we maintain our view that overall HY corporate fundamentals remain on solid footing. With the exception of valuation pressures on individual issuers that missed earnings estimates, we believe earnings before interest, depreciation, taxes and amortisation margins remained ample for the majority of HY issuers, leading to a low default rate outlook from leading market forecasters. We remain committed to our credit selection discipline and passing on deals we believe do not offer adequate investor protection. In terms of performance for HY issuers, the auto, housing and chemical sectors were amongst the worst performers, possibly due to concerns over ongoing trade tensions with China and the future path of interest-rate increases as noted earlier. Although we maintain our view that long-term challenges in the retail, media and telecommunications industries could continue, we remain constructive on HY fundamentals, as mentioned previously. In our opinion, the recent equity volatility is more a reflection of market participants adjusting to the reality of slower economic growth in light of ongoing tariff and geopolitical concerns, rather than a fundamental shift in outlook for the US economy. Similarly, we see the short-term risk to the HY market for the remainder of the year could tilt more towards technically driven conditions, rather than fundamentals. As technical conditions have remained favourable mostly due to limited HY supply, should HY supply noticeably pick up during the remainder of the year due to possible LBO and M&A activities, valuations could be pressured. However, absent UST rate movements that are beyond market consensus expectations and other market surprises, as long as technical conditions do not meaningfully reverse course, positive HY fundamentals can continue and spreads could recover to tighter levels. Portfolio Characteristics 5 Portfolio Yield to Maturity 6.68% 7.41% Yield to Worst 6.61% 7.13% Average Duration 3.96 Yrs 3.87 Yrs Average Credit Quality 6 B+ B+ Average Weighted Maturity 5.01 Yrs 5.18 Yrs 6. The average credit quality (ACQ) rating may change over time. The portfolio itself has not been rated by an independent rating agency. The letter rating, which may be based on bond ratings from different agencies, is provided to indicate the average credit rating of the portfolio s underlying bonds and generally ranges from AAA (highest) to D (lowest). The ACQ is determined by assigning a sequential integer to all credit ratings AAA to D, taking a simple, asset-weighted average of debt holdings by market value and rounding to the nearest rating. The risk of default increases as a bond s rating decreases, so the ACQ provided is not a statistical measurement of the portfolio s default risk because a simple, weighted average does not measure the increasing level of risk from lower rated bonds. The ACQ is provided for informational purposes only. Derivatives are excluded from this breakdown. www.franklintempletongem.com 2
Portfolio Diversification Geographic Weightings vs. 2 UNITED STATES EMU EUROPE CANADA MIDDLE-EAST/AFRICA NON-EMU EUROPE LATIN AMERICA/CARIBBEAN AUSTRALIA/NEW ZEALAND ASIA EX-JAPAN ST CASH & CASH EQUIVALENTS Franklin High Yield Fund Credit Quality Ratings 7 BBB BB B CCC CC NR N/A Cash & Cash Equivalents 0.31 0.20 0.81 3.11 3.81 3.63 2.85 2.29 1.09 0.87 0.08 83.60 10 0% 25% 50% 75% 100% 125% 14.15 36.92 42.70 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Sector Weightings vs. 2 Energy Finance Cable Satellite Health Care Metals & Mining Technology Packaging Media Non Cable Food & Beverage Wireless Utility Building Industrial Restaurants Gaming Retailers Chemicals Treasury & Govt. Related Automotive Consumer Cyclical Services Consumer Products Aerospace & Defence Paper Transportation Lodging Wired Leisure Supermarkets Cash & Cash Equivalents Franklin High Yield Fund 5.59 8.22 8.00 9.96 9.88 9.66 14.78 15.53 4.30 6.41 6.17 8.23 2.57 5.10 4.52 4.55 2.21 4.20 3.16 4.19 2.38 3.81 3.38 3.61 3.25 5.04 1.28 2.76 2.05 3.08 2.01 2.92 1.70 3.17 0.57 1.14 1.04 2.17 0.74 2.20 0.31 1.84 0.23 1.59 0.12 0.70 1.63 1.07 2.94 1.30 0.94 0% 5% 10% 15% 20% Top Ten Holdings 8 Top Holdings % SPRINT COMMUNICATIONS INC 2.56 NAVIENT CORP 2.09 HCA INC 2.04 FIRST QUANTUM MINERALS LTD 1.71 T-MOBILE USA INC 1.61 CCO HOLDINGS LLC / CCO 1.60 HOLDING CHENIERE CORPUS CHRISTI 1.51 HOLDIN BAUSCH HEALTH COS INC 1.51 CSC HOLDINGS LLC 1.50 DISH DBS CORP 1.49 Investment Grade Non-Investment Grade Cash & Cash Equivalents Supplemental Performance Statistics Supplemental Risk Statistics 9 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) Franklin High Yield Fund 6.07 6.53 8.63 9.00 5.00 5.00 7.73 7.92 Tracking Error (%) 1.44 1.91 1.93 2.07 Information Ratio 10-1.20-1.54-1.42-1.15 Beta 1.19 1.28 1.09 1.11 Sharpe Ratio Franklin High Yield Fund 0.66 0.16 0.87 0.28 1.15 0.80 1.33 0.62 9. Beta, Information Ratio and Tracking Error information are measured against the. www.franklintempletongem.com 3
Investment Team Portfolio Manager Years with Firm Years Experience Betsy Hofman, CFA, VP/Portfolio Manager 37 36 Glenn Voyles, CFA, SVP/Director of Portfolio Management, Corporate Credit 25 25 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 invests mainly in debt securities of any quality issued principally by corporations located in the U.S. Such securities have historically been subject to price movements, generally due to interest rates or movements in the bond market. As a result, the performance of the Fund can fluctuate over time. The Fund may distribute income gross of expenses. Whilst this might allow more income to be distributed, it may also have the effect of reducing capital. Other significant risks include: credit risk, derivatives risk, liquidity risk. 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. www.franklintempletongem.com 4
Important Legal Information 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 any of the Luxembourg-domiciled SICAV Franklin Templeton Investment Funds (the Fund ). Given the rapidly changing market environment, Franklin Templeton Investments disclaims responsibility for updating this material. Subscriptions to shares of the Fund can only be made on the basis of the current prospectus of the Fund, accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter. An investment in the Fund entails risks which are described in the Fund s prospectus. If the fund invests in a specific sector or geographical area, the returns may be more volatile than a more diversified fund. A copy of the latest prospectus, the annual report and semi-annual report, if published thereafter can be found on our website: www.franklintempletongem.com or can be obtained, free of charge, from the address below. Issued by Franklin Templeton Investments (ME) Limited, authorized and regulated by the Dubai Financial Services Authority. Dubai office: Franklin Templeton Investments, The Gate, East Wing, Level 2, Dubai International Financial Centre, P.O. Box 506613, Dubai, U.A.E., Tel.: +9714-4284100 Fax:+9714-4284140. Past performance is not an indicator or a guarantee of future performance. 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. Investment in the Fund entails risks which are described in the Fund s prospectus and, where available, in the relevant Key Investor Information Document. Special risks may be associated with a Fund s investment in certain types of securities, asset classes, sectors, markets, currencies or countries and in the Fund s possible use of derivatives. References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund s holdings at any one time. 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. Where a Fund invests in emerging markets, this investment can be more risky than an investment in developed markets. 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. The information provided is not a complete analysis of every material fact regarding any country, market,, 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. Securities mentioned in this report are not a solicitation to purchase those securities, and are examples of some securities which performed well. Not all securities in the portfolio performed well. These securities do not represent all the securities purchased, sold or recommended for advisory clients, and the reader should not assume that investment in the security listed was or will be profitable. Holdings are subject to change, holdings of the same issuer have been combined. The information provided is not a recommendation to purchase, sell or hold any particular security. The security identified does not represent the Fund s entire holdings and in the aggregate, may represent a small percentage of such holdings. There is no assurance that security purchased will remain in the Fund, or that security sold will not be repurchased. In addition, it should not be assumed that any securities mentioned were or will prove to be profitable. For the most current information on the fund, please contact your Franklin Templeton marketing representative. Performance figures are not based on audited financial statements and assume reinvestment of interest and dividends. When comparing the performance of Franklin Templeton Investment Funds (the Fund ) with a benchmark index, it is important to note that the securities in which the Fund invests may be substantially different than those represented by the benchmark index. Furthermore, an investment in Franklin Templeton Investment Funds represents an investment in a managed investment company in which certain charges and expenses, including management fees, are applicable. These charges and expenses are not applicable to indices. Lastly, please note that indices are unmanaged and are not available for direct investment. Certain data and other information shown have been supplied by outside sources. While we consider that information to be reliable, we give no assurance that such data and information is accurate or complete. References to indexes are made for comparative purposes only and are provided to represent the investment environment existing during the time periods shown. The indices include a greater number of securities than those held in the Fund. An index is unmanaged and one cannot invest directly in an index. The performance of the index does not include the deduction of expenses and does not represent the performance of any Franklin Templeton fund. Past performance is not an indicator or a guarantee of future performance. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. Important data provider notices and terms available at www.franklintempletondatasources.com. 2. 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. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 3. Source for all information is Franklin Templeton Investments. Benchmark related data provided by FactSet. Past performance is not an indicator or a guarantee of future performance. Periods greater than one year are shown as average annual total returns. Fund performance data include reinvested dividends, and is net of management fees. Sales charges, other commissions, taxes and other relevant costs to be paid by the investor are not included. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. 4. When performance for either the portfolio or its benchmark has been converted, different foreign exchange closing rates may be used between the portfolio and its benchmark. 5. Yield to Maturity, Yield to Worst, Average Duration and Average Weighted Maturity reflect certain derivatives held in Portfolio (or their underlying reference assets). 7. Ratings shown are assigned by one or more Nationally Recognized Statistical Rating Organizations ( NRSRO ), such as Standard & Poor s, Moody s and Fitch. The ratings are an indication of an issuer s creditworthiness and typically range from AAA or Aaa (highest) to D (lowest). When ratings from all three agencies are available, the middle rating is used; when two are available, the lowest rating is used; and when only one is available, that rating is used. Foreign government bonds without a specific rating are assigned the country rating provided by an NRSRO, if Franklin Templeton Investments The Gate, East Wing, Level 2 Dubai International Financial Centre P.O. Box 506613 Dubai, U.A.E. Tel.: +9714-4284100 Fax.: +9714-4284140 www.franklintempletongem.com 2018 Franklin Templeton Investments. All rights reserved.
available. If listed, the NR category consists of rateable securities that have not been rated by an NRSRO. The N/A category consists of nonrateable securities (e.g., equities). Cash includes equivalents, which may be rated. Derivatives are excluded from this breakdown. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 8. 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. 10. 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). Franklin Templeton Investments The Gate, East Wing, Level 2 Dubai International Financial Centre P.O. Box 506613 Dubai, U.A.E. Tel.: +9714-4284100 Fax.: +9714-4284140 www.franklintempletongem.com 2018 Franklin Templeton Investments. All rights reserved.