THE NEXT WAVE: FINDING TOMORROW S LEADING EMERGING MARKET INVESTMENTS Ahmed Farooq, CFP, CIMA Vice President, ETF Business Development Franklin Templeton Investments For Financial Professional Use Only. Not for Distribution to the Public.
CHANGES IN EMERGING MARKETS For Dealer Use Only / Not for Distribution to the Public
Shanghai, China: About 25 Years Ago For illustrative and discussion purposes only. Source: http://www.businessinsider.com/shanghai-1990-vs-2010-2010-6?ir=t June 2017.
Shanghai, China: Now For illustrative and discussion purposes only. Source: http://www.businessinsider.com/shanghai-1990-vs-2010-2010-6?ir=t June 2017.
Dubai, U.A.E.: About 25 Years Ago For illustrative and discussion purposes only. Source: https://en.wikipedia.org/wiki/file:sheikh_zayed_road_in_1990.jpg June 2017.
Dubai, U.A.E.: Now For illustrative and discussion purposes only. Source: https://en.wikipedia.org/wiki/file:dubai_new.jpg June 2017.
Emerging Markets City Skylines Bombay, India Seoul, South Korea Moscow, Russia Kuala Lumpur, Malaysia For Financial Professional Use Only. Not for Distribution to the Public. 6
Emerging Markets 1987 Investable Emerging Markets in 1987 6 markets: Mexico, Hong Kong, Philippines, Thailand, Malaysia and Indonesia Sources: MSCI, S&P & IFC and EIU World Bank. Important data provider notices and terms available at www.franklintempletondatasources.com. For Financial Professional Use Only. Not for Distribution to the Public. 7
For Financial Professional Use Only. Not for Distribution to the Public. Sources: MSCI, S&P & IFC and EIU World Bank. Important data provider notices and terms available at www.franklintempletondatasources.com. Investable Emerging Markets in December 2017 Emerging Markets 2017 8
Emerging Markets: Market Capitalization Since 1987 1987 2015 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Sources: World Bank and World Federation of Exchanges database. For Financial Professional Use Only. Not for Distribution to the Public. 9
Developed vs. Emerging Markets: Median Age Younger Population & Work Force With a Median Age of 41, Developed Markets skew older. With a Median Age of 26, Emerging Markets skew younger. For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: United Nations. As of 2015. For Financial Professional Use Only. Not for Distribution to the Public. 10
Emerging vs. Developed Markets: P/E Valuations P/E (%) 12 Months Forward As of January 31, 2018 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Sources: Franklin Templeton Investments and MSCI. Developed Markets as represented by the MSCI World and Emerging Markets as represented by MSCI Emerging Markets. There is no assurance that any projection, estimate or forecast will be realized. Important data provider notices and terms available at www.franklintempletondatasources.com. For Financial Professional Use Only. Not for Distribution to the Public. 11
MSCI EM Index % Weights 2008 and 2018 IT, Financials and Energy/Materials January 2008 vs. January 2018 (%) 2008 2018 2008 2018 2008 2018 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com. For Financial Professional Use Only. Not for Distribution to the Public. 12
Technology: Chinese Online Spending Singles Day Biggest Retail Event Globally Thanksgiving, Black Friday and Cyber Monday Online Sales* 2017 $25.3Bn $19.6Bn All Retailers in U.S. Alibaba Singles Day Sales 2017 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Sources: Bloomberg and Techcrunch. *Black Friday online sales US$5.0B, Cyber Monday; US$6.6bn and Thanksgiving US$2.9bn. Total was for the period from November 23 27, 2017. For Financial Professional Use Only. Not for Distribution to the Public. 13
Emerging Markets: Performance Since 1988 19 out of 30 Years Outperformance (63%) Calendar Year Return (CAD) Emerging vs. Developed Markets 1988 2017 Emerging Markets outperformed 19xs out of the last 30 1-year periods For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Sources: 2017 Morgan Stanley Capital International (MSCI) and Morningstar Research Inc. All MSCI data is provided as is. In no event shall MSCI, its affiliates or any MSCI data provider have any liability of any kind in connection with the MSCI data described herein. Copying and redistributing the MSCI data is strictly prohibited. Index returns include reinvestment of dividends. Indices are unmanaged, and one cannot invest directly in an index. Emerging markets as represented by the MSCI Emerging Markets Index and world as represented by the MSCI World Index. Important data provider notices and terms available at www.franklintempletondatasources.com. For Financial Professional Use Only. Not for Distribution to the Public. 14
Emerging Markets: Bear/Bull Markets Bull Markets Bear Markets Cumulative Returns (%) Dates % Increase # of Months Dates % Decline # of Months Bull 01/88 08/97 619% 116 Bear 08/97 09/98-56% 12 Bull 09/98 04/00 117% 19 Bear 04/00 09/01-50% 18 Bull 09/01 10/07 542% 73 Bear 10/07 10/08-65% 12 Bull 10/08 09/14 185% 70 Bear 09/14 01/16-35% 17 Bull 01/16 Average 365% 70-52% 15 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: FactSet. As of January 31, 2018. Bull and bear markets are based on 30% changes of the MSCI EM Index, average does not take into account the current bull numbers. Important data provider notices and terms available at www.franklintempletondatasources.com. For Financial Professional Use Only. Not for Distribution to the Public. 15
Why Emerging Markets Now? High growth Favourable demographics Cheap valuations Improving sentiment For Financial Professional Use Only. Not for Distribution to the Public. 16
For Financial Professional Use Only. Not for Distribution to the Public. Franklin LibertyShares ETFs
Franklin LibertyShares ETFs Franklin LibertyShares ETFs offer a broad suite of passive, smart beta and actively managed ETFs. Our ETFs help you pursue your desired investment outcomes. Spanning multiple asset classes and regions, our ETFs provide investors with a variety of choices in building diversified portfolios. Passive ETFs Smart Beta ETFs Actively Managed ETFs
Types of ETFs PURE PASSIVE Proxy for Market ACTIVE BY DESIGN Targets Specific Investment Outcome ETF Tracks Broad, Market-Weighted Index ETF Tracks Alternatively Designed Index Currency Hedged ESG or SRI* Traditional Fundamentally or Equally Weighted Style Tilted Smart Beta LibertyQT ETFs For Illustrative Purposes Only. There is no guarantee any strategy will achieve its objective. *ESG: Environmental, Social & Governance SRI: Socially Responsible Investment For Financial Professional Use Only. Not for Distribution to the Public. ACTIVE MANAGEMENT Seeks to Outperform ETF Measured Against Benchmark Index Actively Managed Liberty ETFs 19
Timing of Factors Can Be Difficult Calendar Year Returns CAD MSCI Emerging Markets Factor Indices 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10-Yr Return Minimum Vol. -3.85% Minimum Vol. Minimum Vol. Momentum Minimum Vol. Momentum Quality Minimum Vol. -27.75% 22.17% -9.73% 19.53% 10.81% 12.91% 7.32% Value Value Momentum Quality Momentum Minimum Vol. Momentum Minimum Vol. Quality -37.80% 52.10% 18.06% -9.90% 17.60% 6.66% 11.22% 5.48% 6.49% Quality Quality Quality Value Quality Quality Minimum Vol. Quality Value Momentum Momentum -37.96% 51.97% 17.77% -15.83% 16.41% 5.34% 10.21% 4.88% 10.93% 39.39% 4.32% MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets -41.63% 51.59% 12.67% -16.40% 15.61% 3.93% 6.63% 2.04% 7.34% 28.26% 4.14% Momentum Momentum Value Value Value Value Momentum Quality Quality Value -48.67% 36.47% 12.23% 13.31% 1.25% 4.57% 0.74% 2.89% 25.42% 3.35% Minimum Vol. Value Momentum Value 35.65% -2.35% 0.51% 19.65% MSCI EM Quality Index MSCI EM Value Index MSCI EM Momentum Index MSCI EM Minimum Volatility Index MSCI EM Index Minimum Vol. Minimum Vol. 0.31% 18.40% Source: Morningstar Direct. As of December 31, 2017. Past performance is not an indicator or a guarantee of future performance. Factor index performance is derived from back-tested pre-inception performance and is not representative of any ETF s performance. Performance for the MSCI Emerging Markets Index represents actual performance. MSCI Emerging Markets Quality, Momentum, Minimum Volatility and Value Indices were incepted on June 30, 1994, December 29, 2000, May 31, 1993 and December 31, 1996 respectively. While the information is based on hypothetical pre-inception index returns for MSCI Emerging Markets Quality Index, MSCI Emerging Markets Momentum Index, MSCI Emerging Markets Minimum Volatility Index, and MSCI Emerging Markets Value Index, they do not represent any ETF s actual performance. MSCI factor index performance includes pre-inception index returns, based on criteria applied retroactively prior to the index inception date and, as such is hypothetical and for illustrative purposes only. They provide a general indication of the risk/return profile of the respective MSCI single factor indices. Index returns are adjusted for withholding taxes. Returns data represents average annual total returns and assumes reinvestment of interest or dividends. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Indexes are unmanaged, and one cannot invest directly in an index. For Financial Professional Use Only. Not for Distribution to the Public. 20
Factors DNA Markers of Stock Behaviour Quality Value Momentum Low Volatility Stock Performance For Financial Professional Use Only. Not for Distribution to the Public. Factors Primary characteristics that explain stock behaviour over time Some factors have offered a return premium Stocks can be grouped based on shared factors 21
Factors & Weightings Rooted in Economic Rationale LibertyQ Quality Factor LibertyQ Value Factor LibertyQ Momentum Factor LibertyQ Volatility Factor Factors and Weights 50% 30% 10% 10% Factor Role May help drive stock performance & reduce portfolio volatility May help capture opportunities in undervalued companies May help avoid value traps** May help reduce downside risk in uneven markets How We Measure Return on Equity Earnings Variability Cash Return on Assets Leverage Forward/Trailing Price/Earnings Price/Book Dividend Yield 6-Month Risk- Adjusted Price Momentum 12-Month Risk- Adjusted Price Momentum Historical beta based on 2-year weekly returns *Average of Trailing and Forward Earnings **Stocks that appear to be undervalued and continue to trade at low valuations for extended periods For Financial Professional Use Only. Not for Distribution to the Public. 22
Portfolio Construction The portfolio design of smart beta ETFs is based on a proprietary model that incorporates four factors as key drivers of performance: Quality, Value, Momentum, and Low Volatility. The Process in Action The above chart is for illustrative and discussion purposes only. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. For Financial Professional Use Only. Not for Distribution to the Public. 23
Franklin LibertyQT Emerging Markets Index ETF Country Allocations As of March 31, 2018 Source: Franklin Templeton Investments. Total may not equal 100% due to rounding. For Financial Professional Use Only. Not for Distribution to the Public. 24
Franklin LibertyQT Emerging Markets Index ETF Sector Allocations As of March 31, 2018 Source: Franklin Templeton Investments. Total may not equal 100% due to rounding. For Financial Professional Use Only. Not for Distribution to the Public. 25
FLEM Franklin LibertyQT Emerging Markets Index ETF VODACOM INFOSYS LUKOIL Johannesburg, S. AFRICA Bangalore, INDIA Moscow, RUSSIA ~8,000 employees 200,000+ employees 110,000+ employees $966Mn Net Income $2.5Bn Net Income $6.8Bn Net Income Founded in 1994 Founded in 1981 Founded in 1991 Market cap $23Bn Market Cap $39Bn Market Cap $58Bn Provides voice, messaging, data and converged services to over 55 million customers Infosys has 84 sales and marketing offices and 116 development centers across the world in 2017 Second largest oil producer in Russia, producing 12% of national oil reserves (~1.9 Mn barrels daily) Source: Bloomberg. All currencies in USD. All values as of latest financial statements. For Financial Professional Use Only. Not for Distribution to the Public. 26
Franklin LibertyQT Emerging Markets Index ETF Portfolio Characteristics As of March 31, 2018 Franklin LibertyQT Emerging Markets Index ETF MSCI Emerging Markets (Net Dividends) Index ($CAD) Price to Earnings 12.05 14.70 Price to Cashflow 7.62 9.35 Price to Book Value 1.75 1.76 Dividend Yield (%) 3.56 2.36 Weighted Market Cap ($millions) 35,944.86 113,315.79 Total Assets 14,044,601.75 Number of holdings (ex-cash) 201 846 Return on Equity 24.28 17.23 Return on Assets 12.86 8.33 Debt to Equity 15.84 21.10 Source: Franklin Templeton Investments. For Financial Professional Use Only. Not for Distribution to the Public. 27
Franklin LibertyQT Emerging Markets Index ETF Performance Statistics (%) As of March 31, 2018 Sources: Franklin Templeton Investments and Morgan Stanley Capital International (MSCI). Commissions, management fees and expenses may all be associated with investments in ETFs. Investors should carefully consider an ETF s investment objectives and strategies, risks, fees and expenses before investing. The prospectus and ETF facts contain this and other information. Please read the prospectus and ETF facts carefully before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. For Financial Professional Use Only. Not for Distribution to the Public. 28
Market Comparison Franklin LibertyQT Emerging Markets Index vs. MSCI Emerging Markets (Net Dividends) Index (%) Up/Down Capture Ratio December 1, 2002 March 31, 2018 Applying Franklin Templeton s methodology to bundling factors could have provided better returns in both market rallies and downturns. Performance data represents pre-inception hypothetical performance, which does not guarantee future results. The actual performance of any exchange traded product may vary significantly from the pre-inception data presented due to assumptions regarding fees, transaction costs, liquidity or other market factors. Please see slide 45 for additional important disclosures. Source: Morningstar Direct. Performance for MSCI EM represents actual performance. For Financial Professional Use Only. Not for Distribution to the Public. 29
Average Annual Returns Franklin LibertyQT Emerging Markets Index vs. MSCI Emerging Markets (Net Dividends) Index (%) December 1, 2002 March 31, 2018 Performance data represents pre-inception hypothetical performance, which does not guarantee future results. The actual performance of any exchange traded product may vary significantly from the pre-inception data presented due to assumptions regarding fees, transaction costs, liquidity or other market factors. Please see disclaimer slide for additional important disclosures. Source: Morningstar Direct. Performance for MSCI EM represents actual performance. For Financial Professional Use Only. Not for Distribution to the Public. 30
Asset Allocation with Smart Beta: Hypothetical Example HYPOTHETICAL EMERGING MARKETS EQUITY PORTFOLIOS 25% LibertyQ EM 1 75% 1 LibertyQ EM1 75% MSCI EM 2 25% 2 MSCI EM 2 Annualized 10-Year Return 6.11% 7.50% Annualized 10-Year Standard Deviation 15.60% 14.38% 10-Year Sharpe Ratio 0.40 0.51 Max Drawdown 4/1/2008 3/31/2018-44.10% -39.67% Performance data represents pre-inception hypothetical performance, which does not guarantee future results. The actual performance of any exchange traded product may vary significantly from the pre-inception data presented due to assumptions regarding fees, transaction costs, liquidity or other market factors. Please see disclaimer slide for additional important disclosures. 1. LibertyQ Emerging Markets Index Emerging Markets Equity Strategy 2. MSCI Emerging Markets Index Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. For Financial Professional Use Only. Not for Distribution to the Public. 31
Franklin LibertyShares Canada Liberty ETFs ACTIVE ETFs LibertyQT ETFs SMART BETA ETFs For Financial Professional Use Only. Not for Distribution to the Public. 32
For Financial Professional Use Only. Not for Distribution to the Public. Questions
Biography Ahmed Farooq, CFP, CIMA Vice President, ETF Business Development Franklin Templeton Investments Canada Ahmed Farooq is Vice President, ETF Business Development, responsible for directing and expanding the Franklin LibertyShares ETF business across major Canadian Investment Dealers and financial professionals. Ahmed s responsibilities include providing ETF strategy, marketing and product development support. Mr. Farooq has 10 years of experience in the ETF industry and 14 years in the investment industry overall. Prior to joining Franklin Templeton in 2017, Mr. Farooq spent 10 years at BlackRock Canada supporting the promotion and growth of ishares ETFs. Recently, Ahmed was a senior wholesaler covering Toronto and Ottawa. Previously, he managed the internal sales team for the ishares ETF business across Canada and lead wholesaler activities for the firm in Atlantic Canada. Mr. Farooq earned his Bachelor of Commerce degree in Economics with a specialization in Commerce and Finance, and a major in Economics from the University of Toronto. He has completed the Certified Financial Planner (CFP) and has earned his CIMA designation from the Investment Management Consultants Association in conjunction with the Wharton School of Business at the University of Pennsylvania. Mr. Farooq has also completed the Canadian Securities Course (CSC), Conduct & Practices Handbook (CPH), Professional Financial Planning Course (PFP), Wealth Management Techniques (WMT) and has received the designation of Financial Management Advisor (FMA). For Financial Professional Use Only. Not for Distribution to the Public. 34
For Financial Professional Use Only. Not for Distribution to the Public. Appendix
Emerging Markets: GDP, Exports & Imports % World 1987 2015 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: World Bank, World Federation of Exchanges database. For Financial Professional Use Only. Not for Distribution to the Public. 36
World Markets 2007 and 2017 Index Weights in IT January 31, 2008 vs. January 31, 2018 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Sources: Franklin Templeton Investments, FactSet, Bloomberg and MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com. For Financial Professional Use Only. Not for Distribution to the Public. 37
ETF Use Cases A Decision Framework What is your investment objective? What challenges are you looking to achieve with this allocation? Pure Passive ETF Smart Beta ETF Actively Managed ETF Typically market-cap weighted index methodology Capital markets instrument Capture market risk and return Rules-based index methodology Risk management tool Outcome-oriented Portfolio manager insights Potential to outperform benchmark index Maximize investment objective For Financial Professional Use Only. Not for Distribution to the Public. 38
The Top-Performing Emerging Stock Markets in the World Vary Every Year MSCI EM Index and its 23 individual constituency countries Calendar Year Returns (USD) (%) 2013 2017 2013 2014 2015 2016 2017 United Arab Emirates 90.0 Egypt 29.3 Hungary 36.3 Brazil 66.7 Poland 55.3 Top 3 Performers Greece 52.7 Indonesia 27.2 Russia 5.0 Russia 55.9 China 54.3 Qatar 30.0 Philippines 26.4 India -6.1 Peru 55.6 Korea 47.8 EM Index -2.3-1.8-14.6 11.6 37.8 Indonesia -23.1 Hungary -27.4 Brazil -41.2 Mexico -9.0 United Arab Emirates 2.9 Bottom 3 Performers Turkey -26.5 Greece -39.9 Colombia -41.8 Egypt -11.4 Qatar -12.1 Peru -29.8 Russia -45.9 Greece -61.3 Greece -11.9 Pakistan -23.9 For illustrative and discussion purposes only. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results. Source: Morningstar Direct. 2017 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) 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. For Professional Investor Use Only. Not for Distribution to Retail Investors. For Financial Professional Use Only. Not for Distribution to the Public. 39
Franklin LibertyQT Emerging Markets Index ETF Region Allocations As of March 31, 2018 Source: Franklin Templeton Investments. Total may not equal 100% due to rounding. For Financial Professional Use Only. Not for Distribution to the Public. 40
Legal Disclaimers The information presented herein is considered reliable at the present time, however, we do not represent that it is accurate or complete, or that it should be relied upon as such. Speculation or stated beliefs about future events, such as market or economic conditions, company or security performance, upcoming product offerings or other projections represent the beliefs of the speaker and do not necessarily represent the views of Franklin Templeton Investments. General business, market, economic and political conditions could cause actual results to differ materially. The information presented is not a recommendation or solicitation to buy or sell any securities. Please read the prospectus or fund facts before investing. Additional information about the Funds is available in the Funds annual information form, management reports of fund performance and financial statements. You can get a free copy of any or all of these documents, from your dealer, by calling toll-free 1-800-387-0830 or by contacting us at service@franklintempleton.ca. Commissions, management fees and expenses may all be associated with investments in ETFs. Investors should carefully consider an ETF s investment objectives and strategies, risks, fees and expenses before investing. The prospectus and ETF facts contain this and other information. Please read the prospectus and ETF facts carefully before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Video Source: Youtube.com BBC Channel https://www.youtube.com/watch?v=jbksrlysojo 2018 Franklin Templeton Investments Corp. All rights reserved. Franklin Templeton Investments Canada is a business name used by Franklin Templeton Investments Corp. For Financial Professional Use Only. Not for Distribution to the Public. 41