Franklin Templeton Investment Funds Franklin Japan Fund Equity LU0116920520 Fund Manager Report Fund Characteristics Base Currency JPY Total Net Assets (JPY) 25,467,566,917 Fund Inception Date 01.09.2000 Number Of Issuers 68 Primary Benchmark: Tokyo Stock Price Index (TOPIX) Bloomberg Code - A(acc) TEMFTJA LX Fund Management Stephen Dover, CFA: United States Purav Jhaveri, CFA: United States Performance (%) Cumulative Performance Overview Japanese stocks closed slightly lower in August. Early in the month, the market followed U.S. stocks lower after heightening tensions in the Middle East and Ukraine spooked investors and domestic economic data came in below expectations. However, the market pared losses after strengthening U.S. economic data lifted U.S. stocks and the yen weakened. The main contributions to the fund s relative performance in August came from stock selection in consumer staples and consumer discretionary. In contrast, stock selection in industrials and materials detracted from relative returns. 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Incept (25.10.07) Franklin Japan Fund - A(acc) SGD NAV 7.05 26.77 9.43 N/A -40.80 Tokyo Stock Price Index (TOPIX) SGD 8.80 35.05 13.38 N/A -11.56 Annualized Performance (%) Net Of Sales Charge^ Historical Performance 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Incept (25.10.07) Franklin Japan Fund - A(acc) SGD NAV 1.70 6.39 0.78 N/A -8.06 Portfolio Allocation (%) Sector Breakdown(%) Equity 100.04 Cash and Cash Equivalents -0.04 Industrials 26.67 Consumer Discretionary 23.18 Financials 18.48 Information Technology 10.53 Consumer Staples 6.66 Health Care 5.66 Materials 3.59 Telecommunication Services 3.31 Energy 0.98 Utilities 0.95 As at 31 March 2014, Franklin Templeton Japan Fund was renamed Franklin Japan Fund. For information related to the headings Fund Characteristics, Portfolio Allocation, Sector Breakdown, Franklin Japan Fund - A(acc) SGD NAV, please see note regarding Fund Characteristics data and Fund Ratings on back page. Source: Franklin Templeton Investments,. Past performance does not guarantee future results. Source for TOPIX benchmark returns: Tokyo Stock Exchange, Inc. (TSE), as of. Performance calculated as at in SGD; NAV-NAV; dividend reinvested. Past performance is not indicative of future performance. ^Initial sales charge of 5%. For Broker/Dealer and Professional Use Only. Not for public distribution. 1
Franklin Japan Fund Market Review Japanese equities declined slightly in August. Early in the month, stocks fell, weighed down by weakness in U.S. stocks due to heightening tensions in the Middle East and Ukraine, as well as weaker-than-expected economic indicators in Japan, which indicated the impact of April s consumption tax hike was greater than anticipated. However, the market subsequently found support after U.S. stocks gained on evidence that the U.S. economy was gathering strength and the yen weakened. The best performing sectors in the Japanese equity market were pharmaceuticals, where some stocks rose on good results for the first quarter of fiscal 2015, marine transportation, on expectations of improving business prospects, and construction, on continuing positive business environment. Sectors that lagged included metal products and iron and steel, both due to poor first-quarter earnings, and other financials, affected by concerns that a slowdown in capital investments would affect leasing businesses. Performance Review and Contributors to Performance The fund underperformed its benchmark in August. In sector terms, the main contributions to relative performance came from stock selection in consumer staples and consumer discretionary. In consumer staples, an overweighting in beverages company Asahi Group contributed to relative returns. Within consumer discretionary, an overweighting in two-wheeler manufacturer Yamaha Motor aided relative returns. Elsewhere, overweightings in pharmaceutical firm Otsuka Holdings, electronic component manufacturer Alps Electric, telecom construction service provider Taisei, ceramic products manufacturer NGK Insulators and construction company Shimizu contributed to relative performance. In contrast, stock selection in industrials and materials detracted from relative returns. Within industrials, overweightings in industrial and automotive bearings manufacturer NSK, engineering, electrical equipment and electronics company Mitsubishi Heavy Industries, glass manufacturer Asahi Glass, electrical equipment manufacturer Mitsubishi Electric and industrial equipment manufacturer Fuji Electric all detracted from relative returns. In materials, relative returns were hampered by stock selection in the chemicals industry. Elsewhere, overweightings in diversified technology company NEC, automotive components manufacturer Denso and tire manufacturer Bridgestone hindered relative returns. Portfolio Positioning Our medium- to long-term focus areas include the U.S. economy. We expect a strengthening U.S. economy to lead to higher domestic interest rates and a weaker yen. The combination of a strong U.S. economy and weaker yen could boost Japanese corporate earnings and stocks, supported by lower relative valuations. Additional stimulus measures are another focus. The Japanese government is spending a significant part of the current fiscal year s budget by September to offset the negative impact of April s consumption tax hike. If the Japanese economy faces prolonged weakness, additional stimulus measures are possible in the second half of the year. The government could also take other economic measures to boost its approval rating ahead of nationwide local elections scheduled in April next year. Another key area is the government s initiative to promote public-private partnerships to invest in infrastructure. Some large public-private infrastructure projects are already expected in the latter half of 2014. The government plans privately-financed initiatives for the Kansai and Osaka airports, which could serve as a model for publicprivate partnerships going forward. In its recently announced growth strategy, the government plans a three-year program for accelerating private finance initiatives. We will focus on economic sectors sensitive to external and domestic demand. We will increase exposure to economic sectors sensitive to external demand after we see clearer signs of a global economic recovery. We aim to focus on sectors that are exposed to external demand such as industrial electric appliances and machinery and electric parts, with an emphasis on globally competitive companies. We will also focus on sectors that are sensitive to the domestic economy, such as information technology (IT) and services, construction, and building materials (given the strong and stable demand seen in both the public and private sectors). We will scale down our overweighting of financials, as U.S. interest rates, which tend to have a high correlation with the sector, are likely to remain low for longer than expected. In August, we increased positions in select utilities and materials stocks that we believed had improving prospects. In contrast, we sold some IT stocks and booked profits in select consumer discretionary stocks based on valuation considerations. At the end of August, the fund was most overweight in industrials, consumer discretionary and financials. We remained overweight in industrials and consumer discretionary as we believed stocks in these sectors had good earnings and business prospects. Conversely, the fund was most underweight in materials, telecommunication services, utilities and consumer staples. Our underweighting of materials was based on our concerns over the strength of the global economic recovery, while our underweighting of telecommunication services was driven by our belief that the sector faces unattractive business prospects. For Professional Broker/Dealer investor and use only. Professional Not to be distributed Use Only. to retail Not investors. for public distribution. 2
Franklin Japan Fund Performance Review and Contributors to Performance (continued) Top Sector Contributors Top Sector Detractors Top Sector Weights Bottom Sector Weights Sector Sector Sector Sector Consumer Staples Utilities / Information Technology Industrials Telecommunication Services Consumer Discretionary Materials Consumer Discretionary Energy Telecommunications Services Industrials Financials Utilities Sector Weightings vs. Benchmark (%) Franklin Japan Fund Tokyo Stock Price Index (TOPIX) Top Ten Equity Holdings Security Industry % of Total TOYOTA MOTOR CORP Automobiles & Components 4.47 NIPPON TELEGRAPH & TELEPHONE CORP Telecommunication Services 3.31 SUMITOMO MITSUI FINANCIAL GROUP INC Banks 2.86 MITSUBISHI UFJ FINANCIAL GROUP INC Banks 2.54 BRIDGESTONE CORP Automobiles & Components 2.30 MITSUBISHI ELECTRIC CORP Capital Goods 2.22 KEYENCE CORP Technology Hardware & Equipment 2.20 DENSO CORP Automobiles & Components 2.20 MITSUBISHI HEAVY INDUSTRIES LTD Capital Goods 2.15 MIZUHO FINANCIAL GROUP INC Banks 2.14 Total 26.40 Source for Top Sector Contributors, Top Sector Detractors, Top Sector Weights and Bottom Sector Weights : FactSet Research System, Inc. as of. Profile data is calculated as a percentage of total. Holdings of the same issuer have been combined. Source for the Fund s Sector Weightings above: Franklin Templeton Investments as of. Holdings of the same issuer have been combined. Weightings as percent of equity. Source for the benchmark s Sector Weightings above, Tokyo Stock Exchange, Inc. (TSE), as of. For the Top Ten Equity Holdings above, please note that top ten equity holdings information is historical and may not reflect current or future fund characteristics. All holdings are subject to change. Holdings of the same issuers have been combined. 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 in the top 10 holdings list. For Professional Broker/Dealer investor and use only. Professional Not to be distributed Use Only. to retail Not investors. for public distribution. 3
Franklin Japan Fund Performance Review and Contributors to Performance (continued) Portfolio Characteristics Earnings Investment Outlook We expect the Japanese stock market to stay on a medium- to long-term upward trend. Risks to the forecast include an increase in geopolitical tensions and weaker-than-expected economic growth in Japan and Europe, while support could come from strength in the U.S. economy and weakness in the yen, which would improve investor sentiment and earnings estimates for Japanese companies. Japan s parliament session begins in September and the government will need to decide on several important policy issues by year end, including a consumption tax increase scheduled for October 2015, a reduction in corporate tax rates and the possibility of additional growth policies. With the government spending a significant part of the fiscal year 2015 budget by September to offset the negative impact of April s consumption tax hike, additional budget spending may be required after October if the economic situation does not improve. Book Value Investment Objective Cash Flow Dividend Yield Market Cap (JPY Millions) Franklin Japan Fund (Wtd. Avg.) 14.89x 1.38x 6.70x 1.61% 3,018,667 Tokyo Stock Price Index (TOPIX) (Wtd. Avg.) 14.37x 1.23x 7.21x 1.80% 2,943,781 Long-term capital appreciation by investing primarily in Japanese equity securities. The Fund may also seek investment opportunities in other types of securities such as preferred stock, convertibles and corporate and government debt obligations. Investment Philosophy The foundation of the Templeton Emerging Markets Team s investment philosophy value-oriented, patient, bottom-up, global investing has remained consistent for several decades. Its strategy is grounded in patience and the belief that on a short-term basis, stocks overreact to news and noise. On a long-term basis, markets are efficient and patience will reward those who have identified undervalued stocks. Through proprietary research, Templeton seeks to identify quality investments in frequently unfashionable and undervalued stocks. For information related to the heading Portfolio Characteristics above, please see note regarding Fund Characteristics data on back page. Source: Franklin Templeton Investments,. Past performance does not guarantee future results. For Professional Broker/Dealer investor and use only. Professional Not to be distributed Use Only. to retail Not investors. for public distribution. 4
Franklin Japan Fund Explanatory Notes Fund Characteristics: The Earnings, Cash Flow and Book Value calculations shown herein use harmonic means. Values less than 0.01 (i.e. negative value) are excluded and values in excess of 200x are capped at 200x. Yields above 100% are also excluded. For the benchmarks, 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 presenter. Yield figures quoted should not be used as an indication of the income to be received. Fund Ratings: Copyright - 2014 Morningstar, Inc. All rights reserved. Morningstar Rating as of date indicated above, in the respective Morningstar TM Category relevant to the fund. The information contained herein: (1) is proprietary to Morningstar; (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. Fund performance data include reinvested dividends, and is net of management fees. Sales charges, other commissions, taxes and other relevant costs to be aid by the investor are not included. Disclaimers: As at 31 March 2014, Franklin Templeton Japan Fund was renamed Franklin Japan Fund. 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 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 the security level, not aggregated up to the main issuer. The dividend yield quoted here should not be used as an indication of the income to be received from this portfolio. 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 Franklin Templeton Investment Funds 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. The indices are provided only to show the investment environment during the specific periods shown. The performance of each index does not include the deduction of expenses and does not represent the performance of any Franklin Templeton fund. 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. Past performance is no guarantee of future results. 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. Stocks mentioned in this report are not a solicitation to purchase those stocks, and are examples of some stocks which performed well. Not all stocks in the portfolio performed as well. TOPIX, TOPIX Total Return Index, Size-based TOPIX sub-indices and TOPIX sector indices, calculated and published by Tokyo Stock Exchange, Inc. (TSE), are intellectual properties that belong to TSE. This information is not a complete analysis of every material fact regarding these securities and should not be viewed as an investment recommendation. Any views expressed are the views of the portfolio manager and do not constitute investment advice. This report, issued by Franklin Templeton Investments, does not constitute or form part of any offer to invest nor is it an invitation to invest. Subscriptions may only be made on the basis of the most recent Prospectus and Product Highlights Sheet which is available at Templeton Asset Management Ltd or our authorised distributors. Investors should read the Prospectus and Product Highlights Sheet for details before investing. Past performance is not necessarily a guide to future performance and the value of the shares and the income from them may fall as well as rise. This investment product is not available to U.S. and Canadian residents or citizens. Investors may wish to seek advice from a financial adviser before making a commitment to invest in shares of the Fund. Copyright 2014. Franklin Templeton Investments. All rights reserved. Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E For Broker/Dealer and Professional Use Only. Not for public distribution. For Professional investor use only. Not to be distributed 2014 to retail Franklin investors. Templeton Investments. All rights reserved. 5