PRODUCT PROFILE FOURTH QUARTER 2011 FUND CHARACTERISTICS (AS OF 12/31/11) NASDAQ Symbol FRAVX Inception Date 6/1/07 Dividends Investment Style Lipper Classification Morningstar Category Total Net Assets All Share Classes Annually in December Value Russell 3000 Value Index Multi-Cap Value s Mid-Cap Value 24 million Number of Holdings 43 Maximum Initial Sales Charge 5.75% THIRD-PARTY FUND DATA Overall Morningstar Rating Traditional «Load Waived ««As of December 31, 2011 the fund s Class A shares received a traditional 1 star overall Morningstar Rating and a load waived 2 star Morningstar Rating, measuring risk-adjusted returns against 354 U.S.-domiciled Mid-Cap Value funds over the 3- year period. A fund s overall rating is derived from a weighted average of the performance figures associated with its 3-, 5- and 10-year (if applicable) rating metrics. Load waived Class A share Morningstar Ratings do not include front-end sales charges and are intended for investors who have access to such purchase terms (e.g., fee-based programs and participants of a defined contribution plan). Investors should contact their financial advisor to determine their eligibility to purchase Class A shares without paying the sales charge. FUND DESCRIPTION Franklin All Cap Value seeks long-term total return by primarily investing in equity securities of companies of any size that the fund s managers believe are undervalued at the time of purchase and have the potential for capital appreciation. PERFORMANCE DATA Average Annual Total Returns for Periods Ended December 31, 2011 (%) 3 Mths* YTD* 1 Yr 3 Yrs Total Annual Operating Expenses With Waiver:1.23% Without Waiver:1.96% Since Incept (6/1/07) With Sales Charge 3.73-11.09-11.09 10.58-4.13 Without Sales Charge 10.02-5.68-5.68 12.81-2.89 13.33-0.10-0.10 11.63-4.63 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 Sales and Marketing Services at (800) DIAL BEN/342-5236 or visit franklintempleton.com for the most recent month-end performance. investment results reflect an expense reduction, without which the results would have been lower. The fund's expense ratio, without waiver, does not include an expense reduction contractually guaranteed through at least February 29, 2012. Please see the prospectus for additional information. Average Annual Total Returns for Periods Ended December 31, 2011 (%) 20 5-10 3 Mths* YTD* 1 Yr 3 Yrs Since Incept Franklin All Cap Value Class A Without Sales Charge Calendar Year Returns As of December 31, 2011 (%) 24.94 21.80 19.76 26 16.23-6 10.02 13.33-5.68-0.10-5.68-0.10-5.68-0.10 12.81 11.63-2.89-4.63-32.20-36.25-38 2011 2010 2009 2008 Franklin All Cap Value Class A Without Sales Charge If the fund's sales charge had been included, the returns would have been lower. *Cumulative Total Returns. For information related to the Characteristics, Third-Party Data, and Performance Data sections, please see Explanatory Notes. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE 1 of 6
PORTFOLIO DIVERSIFICATION (AS OF 12/31/11) Top Ten Holdings Issuer Name Industry % of Total 1. PEPSICO INC Food Beverage & Tobacco 4.40 2. BRISTOW GROUP INC Energy 4.03 3. KRAFT FOODS INC Food Beverage & Tobacco 3.98 4. SENECA FOODS CORP Food Beverage & Tobacco 3.87 5. WAL-MART STORES INC Food & Staples Retailing 3.82 6. INTERNATIONAL BUSINESS MACHINES CORP Software & Services 3.81 7. MICROSOFT CORP Software & Services 3.68 8. JOHNSON & JOHNSON Pharmaceuticals, Biotechnology & Life Sciences 3.59 9. NATURAL GAS SERVICES GROUP INC Energy 3.29 10. XEROX CORP Technology Hardware & Equipment 3.10 Total 37.57 Sector Weightings vs. (% of Equity) Market Capitalization Breakdown in USD Consumer Staples 7.75 22.70 Energy 11.74 19.21 < 1.5 Billion 26.90 Information Technology 9.04 14.75 Industrials 9.65 12.81 1.5-5.0 Billion 16.60 Health Care 9.87 12.27 5.0-25.0 Billion 22.50 Materials 2.82 6.50 Utilities 5.76 7.75 25.0-50.0 Billion 1.30 Consumer Discretionary 5.35 9.13 Financials 3.05 25.37 > 50.0 Billion 32.70 Telecommunication Services 0.00 4.48 Franklin All Cap Value Portfolio Allocation (%) 0 6 12 18 24 30 Equity 91.47 Cash & Cash Equivalents 8.53 Largest Sector Contributors vs. Sector Total Effect (%) Franklin All Cap Value 0 8 16 24 32 40 Smallest Sector Contributors vs. Sector Total Effect (%) Consumer Staples 0.42 Health Care -1.11 Financials 0.35 Industrials -1.10 Energy 0.34 Information Technology -0.98 Telecommunication Services 0.28 Materials -0.74 Utilities 0.27 Cash & Other Net Assets -0.60 Contributor data shown is for the period 10/1/11 to 12/31/11 For information related to the Portfolio Diversification section, please see Explanatory Notes. 2 of 6
PORTFOLIO CHARACTERISTICS (AS OF 12/31/11) vs. Weighted Average Market Capitalization (Millions USD) 52,848 69,760 Median Market Capitalization (Millions USD) 8,704 762 Price to Earnings Weighted Average 14.94x 12.49x Median 15.36x 15.61x Price to Book Value Weighted Average 1.46x 1.37x Median 1.28x 1.32x Price to Cash Flow Weighted Average 8.33x 5.97x Median 8.34x 7.96x PERFORMANCE RISK STATISTICS - Class A Modern Portfolio Theory (MPT) Statistics (As of 12/31/11) Performance Risk Statistics 3 Years Standard Deviation 20.52 Alpha 1.53 Beta 0.96 Sharpe Ratio 0.62 Information Ratio 0.29 Tracking Error 4.13 R-Squared 96.16 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 Sales and Marketing Services at (800) DIAL BEN/342-5236 or visit franklintempleton.com for the most recent month-end performance. Risk vs. Return 3-Year Period Ended 12/31/11 Return (%) 24 18 12 6 0 0 9 18 27 36 45 Risk (Standard Deviation) (%) Franklin All Cap Value Class A Without Sales Charge If the fund's sales charge had been included, the returns would have been lower. GLOSSARY Alpha: Alpha measures the difference between a fund's actual returns and its expected returns given its risk level as measured by its beta. A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta. Some investors see alpha as a measurement of the value added or subtracted by a fund's manager. : An unmanaged group of securities whose overall performance is used as a standard to measure investment performance. 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. Price to Book Value (P/BV): The price per share of a stock divided by its book value (i.e., net worth) per share. For a portfolio, the ratio is the weighted average price/book ratio of the stocks it holds. Price to Cash Flow (P/CF): Supplements price/earnings ratio as a measure of relative value; represents a weighted average of the price/cash flow ratios for the underlying fund holdings. Price to Earnings (P/E): The share price of a stock, divided by its per-share earnings over the past year. For a portfolio, the weighted average P/E ratio of the stocks in the portfolio. P/E is a good indicator of market expectations about a company's prospects; the higher the P/E, the greater the expectations for a company's future growth in earnings. R-Squared: A measure of how much of a portfolio's performance can be explained by the returns from the overall market (or a benchmark index). If a portfolio's total return precisely matched that of the overall market or benchmark, its R-squared would be 100. If a portfolio's return bore no relationship to the market's returns, its R-squared would be 0. 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 a fund's return varies from its previous returns or from the average of all similar funds. The larger the standard deviation, the greater the likelihood (and risk) that a security's performance will fluctuate from the average return. Tracking Error: Measure of the deviation of the return of a fund compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment fund is managed, the smaller the tracking error. For information related to the Portfolio Characteristics and Performance Risk Statistics sections, please see Explanatory Notes. 3 of 6
MARKET REVIEW U.S. stock markets endured significant volatility during the fourth quarter of 2011, reflecting recurring bouts of investor risk aversion, but they generally closed the period with solid gains. Growth in real U.S. gross domestic product for the third quarter was revised down to 1.8% annualized from the 2.0% growth rate reported in November. The U.S. labor market recovery gathered momentum during the quarter as surveys showed job gains of 412,000, with private payrolls up 466,000. The unemployment rate fell from 8.9% in October to 8.7% in November and 8.5% in December. The Conference Board's Consumer Confidence Index of U.S. sentiment rose considerably over the quarter to 64.5 in December from 55.2 in November and 40.9 in October. PERFORMANCE REVIEW AND CONTRIBUTORS TO PERFORMANCE At quarter-end, the fund's largest sector concentration was in consumer staples, followed by energy and information technology. Its five largest portfolio holdings were PepsiCo Inc. (consumer staples), Bristow Group Inc. (energy). Kraft Foods Inc. (consumer staples), Seneca Foods Corp. (consumer staples), and Wal-Mart Stores Inc. (consumer staples). Three new positions were added to the portfolio during the period: a producer of residential and commercial building products, a global manufacturer of water products and electronic enclosures, and a cable television provider. Consistent with our value strategy, we built on numerous existing positions such as Eaton Corp. (industrials), J.C. Penney and Co. (consumer discretionary) and US Bancorp. (financials). During the period, the fund exited three positions, namely Hospira Inc., Peabody Energy Corp. and Pharmaceutical Development Inc. (PPDI). PPDI was subject to an all-cash takeover offer from the Carlyle Group and Hellman and Friedman of $33.25 per share, a 29% premium over the previous day's closing price. The fund's best-performing stocks on a contribution-to-return basis were led by Seneca Foods Corp. (+30%), Wal-Mart Stores Inc. (+16%), and oil services provider PHI Inc. (+30%). Detractors from fund performance included specialty pharmaceutical company Hospira Inc. (-21%), power cable manufacturer Nexans (-10%), and ceramic body armor maker Ceradyne Inc. (-0.4%). Within a constantly changing market environment, we are convinced our value investment philosophy provides shareholders with a portfolio of well-managed companies with strong balance sheets and attractive prices. As dedicated to value investing as we are, we nevertheless believe that prudent investors should seek a balance of growth, value and international funds in their portfolios to help reduce volatility over the long term. We urge investors to keep a long-term perspective to guard against overly emotional short-term investment decisions. The above commentary does not provide a complete analysis of every material fact regarding any market, region, industry, security, portfolio or pooled investment vehicle. Portfolio holdings information, opinions and other market or economic information and data provided are as of the date of the commentary, unless another date is expressly indicated, and may change without notice. Statements of fact cited by the manager have been obtained from sources considered reliable but no representation is made as to their completeness or accuracy. The manager s assessment of a particular industry, region, security, sector or investment is intended solely to provide insight into the manager s investment process and is not a recommendation to buy or sell any security, nor investment advice. References to particular securities or sectors are only for the limited purpose of illustrating general market or economic conditions and are not recommendations to buy or sell a security. Although historical data is no guarantee of future results, these insights may help you understand our investment management philosophy. 4 of 6
INVESTMENT PROCESS INITIAL SCREEN INDIVIDUAL COMPANY ANALYSIS INDUSTRY ANALYSIS CONSTRUCT AND MONITOR PORTFOLIO Screen initial universe of 9,000 global stocks to search for companies across all market caps with strong balance sheets and trading at low valuations Identify companies with: Strong balance sheets Ability to generate free cash flow Sustainable business models Effective, shareholderfriendly management Valuable customer franchises Set target sell price Assess the industry for: Stable or growing business trends High barriers to entry Rational competitors Purchases securities at bargain prices presenting most attractive potential for gains in market Monitor fundamentals Assume security will be held for 5+ years No consideration given to the benchmark Market cap holdings are a residual of our bottom-up investment process Review target price Continual screening of stock universe and monitoring of current portfolio INVESTMENT AND MANAGEMENT TEAM (AS OF 12/31/11) Franklin All Cap Value Years with Firm Years Experience William J. Lippman 25 57 Steve Raineri 6 17 Bruce C. Baughman, CPA 24 28 Margaret McGee 23 27 Donald G. Taylor, CPA 15 30 Franklin U.S. Value Group Management Team Years with Firm Years Experience William J. Lippman - President and Chief Investment Officer 25 57 Franklin U.S. Value Group Number of Members Average Years Experience Portfolio Managers/Analysts 7 26 Research Analysts 5 22 WHAT ARE THE RISKS Value securities may not increase in price as anticipated or may decline further in value. While smaller and mid-size companies may offer substantial opportunities for capital growth, they also involve heightened risks and should be considered speculative. Historically, smaller and mid-size company securities have been more volatile in price than larger company securities, especially over the short term. The fund may invest up to 25% of its total assets in foreign securities, which may involve special risks, including currency fluctuations and economic and political uncertainty. These and other risks are detailed in the fund s prospectus. 5 of 6
EXPLANATORY NOTES FUND CHARACTERISTICS Number of Holdings: All portfolio holdings are subject to change. THIRD-PARTY FUND DATA Morningstar Rating : Source: Morningstar 12/31/11. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on how a fund ranks on a Morningstar Risk-Adjusted Return measure against other funds in the same category. This measure takes into account variations in a fund s monthly performance after adjusting for sales loads (except for load-waived A shares), redemption fees, and the risk free rate, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. Class A shares of Franklin All Cap Value received a traditional Morningstar Rating of 1 star(s) for the 3-year period. Load-waived Class A shares of Franklin All Cap Value received a Morningstar Rating of 2 star(s) for the 3-year period. The Morningstar Rating may differ among share classes of a mutual fund as a result of different sales loads and/or expense structure. Past performance does not guarantee future results. 2012 Morningstar, Inc. All rights reserved. The information contained herein is proprietary to Morningstar and/or its content providers; may not be copied or distributed; and is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. PERFORMANCE DATA The fund offers other share classes subject to different fees and expenses, which will affect their performance. Source for Index: FactSet. Indexes are unmanaged and one cannot invest directly in an index. The Russell index shown is a trademark/servicemark of the Frank Russell Company. PORTFOLIO DIVERSIFICATION Top Ten Holdings: Holdings of the same issuer have been combined. Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise be included. For updated information, call Franklin Templeton Investments at (800) DIAL BEN/(800) 342-5236 or visit franklintempleton.com. Sector Weightings/Market Capitalization Breakdown: Weightings as percent of equity. Percentage may not equal 100% due to rounding. Information is historical and may not reflect current or future portfolio characteristics. Largest/Smallest Sector Contributors: Total effect represents the opportunity cost of investment decisions in a group relative to overall benchmark. Source for Index: FactSet. Indexes are unmanaged and one cannot invest directly in an index. PORTFOLIO CHARACTERISTICS The portfolio characteristics listed are based on the fund's underlying holdings, and do not necessarily reflect the fund's characteristics. Due to data limitations all equity holdings are assumed to be the primary equity issue (usually the ordinary or common shares) of each security's issuing company. This methodology may cause small differences between the portfolio's reported characteristics and the portfolio's actual characteristics. In practice, Franklin Templeton's portfolio managers invest in the class or type of security which they believe is most appropriate at the time of purchase. The market capitalization figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. All portfolio holdings are subject to change. Source: FactSet. For the portfolio, the Price to Earnings, Price to Cash Flow, and Price to Book Value calculations for the weighted average use harmonic means. Values less than 0.01 (i.e., negative values) are excluded and values in excess of 200x are capped at 200x. For the benchmark, no limits are applied to these ratios in keeping with the benchmark's calculation methodology. Market capitalization statistics are indicated in the base currency for the portfolio presented. PERFORMANCE RISK STATISTICS Risk vs. Return: Risk is measured by the annualized standard deviation of monthly total returns. Performance of the fund does not include sales charges (if applicable), but it does include dividends and capital gains reinvested at net asset value. Source for Index: FactSet. Indexes are unmanaged and one cannot invest directly in an index. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, California 94403-1906 (800) DIAL BEN (800) 342-5236 TDD (Hearing Impaired) (800) 851-0637 franklintempleton.com 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/(800) 342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. 2012 Franklin Templeton Investments. All rights reserved. 448 PP 12/11 UPD 05/12 6 of 6