Templeton European Fund A (acc) EUR Franklin Templeton Investment Funds Fund Manager Report Value Equity Product Details 1 Fund Assets 200,317,407.13 Fund Inception Date 17.04.1991 Number of Issuers 71 Bloomberg ISIN Base Currency Investment Style Benchmark Morningstar Category Overall Morningstar Rating TM 3 TEMEUAA LX LU0139292543 EUR Value Europe Large-Cap Value Equity Asset Allocation 2 % Equity 99.41 Cash & Cash 0.59 Equivalents Fixed Income 0.00 Fund Description The fund aims to achieve long-term capital appreciation by investing primarily in equity securities (common stock) issued by European corporations as well as debt obligations of European corporations and governments. Key Points European equities rebounded to their highest levels of the year in October as solid economic data and corporate earnings results offset the negative impact of a destabilising separatist movement in Spain. Stock selection in the financials, industrials and materials sectors detracted from relative performance in October. A mixture of improving economic conditions, reinforced policy resolve and significant bottom-up restructuring has led to a pronounced rebound in European bank shares over the past 18 months. Whilst further upside potential persists, future sector performance may depend on factors outside of management s control, like the trajectory of interest rates and credit demand. Whilst our overweight allocation to the health care sector detracted as the sector remained under pressure during the month, strong stock selection offset the impact of unfavourable allocation and contributed to relative performance. We continue to believe that regulatory fears and competitive concerns have excessively pressured valuations in the health care sector. An overweight in the energy sector also contributed to relative performance as the price of oil firmed during the month. Performance Data Performance Net of Management Fees as at 31.10.2017 (Dividends Reinvested) (%) 4 1 Mth 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception (03.12.2001) A (acc) EUR 1.20 4.57 9.24 19.53 8.70 10.68 1.87 3.62 MSCI Europe Index 1.97 5.14 12.31 20.21 8.67 11.10 3.49 5.11 Calendar Year Returns (%) 50% 0% -50% 4.33 3.22 12.46 8.78 7.40-5.12 30.04 20.51 18.90 18.09-7.59-7.51 7.15 11.75 32.55 21.42-42.88-43.29-3.36 3.17-100% 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 A (acc) EUR Past performance is not an indicator or a guarantee of future performance. Portfolio Manager Insight Market Review European equities rebounded to their highest levels of the year in October as solid economic data and corporate earnings results offset the negative impact of a destabilising separatist movement in Spain. European companies grew earnings by about 8% in the third quarter (amongst those firms that had reported at the end of October) and the European Commission s Economic Sentiment Index rose to the highest level in 17 years. On the economic front, third-quarter eurozone gross domestic product grew at an annualised 2.5% pace, with the continental economy (EA 19) delivering its 18th consecutive quarter of positive growth. Against a backdrop of still-low inflation, the European Central Bank (ECB) announced it would keep interest rates near zero and extend its quantitative easing programme (albeit at a slower pace) for another nine months. Political news in the region centred on Spain, where the province of Catalonia declared independence following an unofficial referendum, causing the federal government to seize control of regional institutions. Elsewhere in the region, resilient economic activity in the United Kingdom 1. All holdings are subject to change. Holdings of the same issuers have been combined.
convinced the Bank of England to reverse a post-brexit vote interest rate cut, lifting benchmark rates (by 25 basis points) for the first time in a decade. In other asset classes, the euro finished lower against the US dollar and British pound but flat against the yen, industrial metals rallied on better Chinese construction demand and oil prices firmed on improving global supply dynamics. Performance Review Stock selection in the financials, industrials and materials sectors detracted from relative performance in October. European lender UniCredit was a significant financials sector detractor for the month. Shares initially rose after the firm reported a six-fold jump in quarterly profit, buoyed by a major divestiture and higher revenue from fees and commissions. However, the stock retreated later in the month following reports that the ECB was reviewing the recent sale of UniCredit s non-performing loan portfolio to determine whether the price booked had been inflated by fees. Concerns stem from the fact that a lower price could lead to higher provisions, potentially impacting the bank s capital and impairing the credibility of CEO Jean Pierre Mustier, who took the helm in July 2016 with a bold plan to turn around the struggling bank. Shares have been up two-thirds since Mr. Mustier took over at UniCredit, and we have remained believers in his restructuring strategy, which includes cost cutting, recapitalisation and resolution of the bank s bad loan book. Whilst any repricing of the loan sale would represent a setback on this final point, we nevertheless believe over the longer term that UniCredit can make solid progress towards the restoration of profitability and balance sheet health. More broadly, a mixture of improving economic conditions, reinforced policy resolve and significant bottom-up restructuring has led to a pronounced rebound in European bank shares over the past 18 months. Nevertheless, according to our analysis, the sector is still worth less than half of its prefinancial crisis market capitalisation and trades below levels experienced in other post-crisis periods like 2009-2011 and 2014-2015. Whilst further upside potential persists, future sector performance may depend on factors outside of management s control, like the trajectory of interest rates and credit demand. From the industrials sector, shares of UK defence contractor BAE Systems declined after the firm announced plans to cut some 2,000 jobs amidst tepid sales of its Eurofighter Typhoon fighter jet and a slimming down of its naval ships and cyber-security business. The stock also has been pressured by generalised concerns about a weaker UK defence budget, particularly in the event of a Labour government. Nevertheless, we note that both Prime Minister Theresa May and the opposition Labour Party recently re-committed to meeting the 2% of GDP defence spending target, with the incumbents also vowing to increase the budget by at least 0.5% above inflation annually. Furthermore, we think concerns about Eurofighter orders are now well reflected in the share price and that any additional orders represent undiscounted potential upside. We note that Eurofighter already has been a strong programme, generating substantial revenues and increasingly contributing to the firm s strong service business. Whilst our overweight allocation to the health care sector detracted as the sector remained under pressure during the month, strong stock selection offset the impact of unfavourable allocation and contributed to relative performance. The shares of Dutch diagnostics firm Qiagen rallied after a US court rejected a competitor s challenge to block the release of a promising new product. At the end of last year, Qiagen outlined ambitious mediumterm growth targets based on strong conditions in its molecular and applied testing divisions. Results over the course of this year suggest these businesses are performing well, and we believe Qiagen has the potential to deliver strong earnings growth through 2020. The company is wellpositioned in favourable end markets and remains cash-generative and technology-rich in a consolidating sector. Whilst no longer an outright bargain, in our view, we remain holders in anticipation of additional upside potential. More broadly, we continue to believe that regulatory fears and competitive concerns have excessively pressured valuations in the health care sector. We have found what we view as significant long-term value in depressed pharmaceuticals companies with innovative pipelines and novel drug franchises capable of dealing with pricing and competitive issues on a case-by-case basis. An overweight in the energy sector also contributed to relative performance as the price of oil firmed during the month. Portuguese integrated oil producer Galp Energia benefitted from supply shortages caused by a refinery fire in Rotterdam and hurricane-related capacity closures in the United States. We remain constructive on the stock given what we view as its undemanding valuation, integrated business model and strong production growth potential in some of the world s most attractive offshore oilfields. With a strong balance sheet, secure dividend yield backed by healthy free cash flow and excellent production growth opportunities from a low-cost resource base, Galp has, in our view, plenty of scope to grow into a much larger integrated energy company over the course of our long-term investment horizon. More broadly, we have continued to find bargains in the energy sector, where a number of stocks still discount oil prices well below current spot levels, according to our analysis. Portfolio Positioning During the period, the portfolio was overweight in the health care, energy, financials and information technology sectors, and underweight in the consumer staples, consumer discretionary, industrials and real estate sectors. Outlook & Strategy We believe European equities remain attractively valued relative to their global counterparts. Europe is earlier in its economic cycle than the United States and has benefitted from generally rebounding corporate profits, rising employment and upticks in consumption and investment. We have also seen constructive developments on the political front, with the Catalonian separatist movement failing thus far to spark any contagion and election victories accruing to pro-integration and reform-minded politicians. Absent inflationary pressures, we believe the European Central Bank has sufficient flexibility to respond to evolving financial conditions and eventually begin normalising monetary policy over time. That said, inflection points in the cycle are often unpredictable and unexpected. In these uncertain times, we continue to caution against blindly buying the market in this late cycle and dearly valued environment. To the contrary, we believe the ability to spot secular business and product cycle trends, and identify stocks still trading at a discount to their long-term intrinsic value, will be instrumental in potentially accumulating and preserving wealth over the long term as the cycle matures and eventually inflects. Portfolio Characteristics 5,6 Portfolio Price to Earnings (12 Month Trailing) 18.50x 20.04x Price to Book Value 1.48x 1.92x Price to Cash Flow 8.06x 10.29x Market Capitalisation (Millions in EUR) 43,429 57,938 Dividend Yield 2.81% 3.20% www.franklintempleton.co.za 2
Portfolio Diversification Top Sector Contributors 7,7 Total Sector Effect (%) Consumer Staples 0.45 Telecommunication Services 0.28 Energy 0.28 Health Care 0.17 Industrials 0.06 Top Sector Detractors 7,7 Total Sector Effect (%) Information Technology -1.66 Financials -1.43 Consumer Discretionary -0.32 Materials -0.28 Utilities -0.05 Contributors/detractors data shown is for the period from 01/10/2017 to 31/10/2017. Top Security Contributors 7,8 Security Total Effect (%) QIAGEN NV 0.14 DEUTSCHE LUFTHANSA AG 0.13 GALP ENERGIA SGPS SA 0.12 GLAXOSMITHKLINE PLC 0.11 LIVANOVA PLC 0.10 Top Security Detractors 7,8 Security Total Effect (%) UNICREDIT SPA -0.21 INDRA SISTEMAS SA -0.10 BAE SYSTEMS PLC -0.10 VECTURA GROUP PLC -0.09 CREDIT AGRICOLE SA -0.08 Contributors/detractors data shown is for the period from 01/10/2017 to 31/10/2017. Geographic Weightings vs. 2 United Kingdom 23.19 27.54 Germany 15.24 19.90 France 13.78 16.77 Netherlands 5.76 12.78 Italy 5.51 3.78 Switzerland 5.10 12.45 Belgium Spain Portugal Denmark Sweden Ireland Norway Austria Cash & Cash Equivalents 3.19 1.84 3.06 5.31 3.00 0.24 2.47 2.91 2.27 4.49 1.94 0.70 1.90 1.07 1.33 0.40 0.59 0.00 0% 25% 50% Sector Weightings vs. 2 Financials 25.17 20.98 Health Care 23.84 12.30 Energy 16.74 7.26 Industrials 7.71 13.33 Materials 7.09 8.06 Information Technology 6.50 4.94 Telecommunication Services 4.47 3.75 Utilities 3.36 3.69 Consumer Discretionary 3.16 10.63 Consumer Staples 1.37 13.75 Real Estate 0.00 1.30 Cash & Cash Equivalents 0.59 0.00 0% 5% 10% 15% 20% 25% 30% Templeton European Fund Templeton European Fund www.franklintempleton.co.za 3
Top Ten Holdings 9 Top Holdings Sector Country % ROYAL DUTCH SHELL PLC Energy United Kingdom 3.12 GALP ENERGIA SGPS SA Energy Portugal 3.00 BP PLC Energy United Kingdom 2.79 LANXESS AG Materials Germany 2.50 BNP PARIBAS SA Banks France 2.36 QIAGEN NV Pharmaceuticals, Biotechnology & Life Netherlands 2.27 Sciences GETINGE AB Health Care Equipment & Services Sweden 2.27 SAP SE Software & Services Germany 2.26 UNICREDIT SPA Banks Italy 2.20 ENI SPA Energy Italy 2.14 Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) Templeton European Fund 13.94 12.45 15.65 16.22 12.94 11.27 15.34 14.97 Tracking Error (%) 3.94 4.27 4.53 4.96 Information Ratio 11 0.00-0.10-0.36-0.29 Beta 1.00 1.01 0.97 1.02 Sharpe Ratio Templeton European Fund 0.66 0.88 0.09 0.13 0.71 1.01 0.20 0.24 Investment Team Portfolio Manager Years with Firm Years Experience Dylan Ball, EVP, Portfolio Manager, Research Analyst 10 17 Heather Arnold, CFA, EVP, Director of Research, Portfolio Manager, 12 33 Research Analyst Peter Moeschter, CFA, EVP, Portfolio Manager, Research Analyst 20 25 Templeton Global Equity Team Number of Members Average Years Experience Portfolio Managers/Analysts 26 23 Research Analysts 10 11 10. Beta, Information Ratio and Tracking Error information are measured against the. www.franklintempleton.co.za 4
Important Legal Information Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from Franklin Templeton International Services S.à r.l., 8A rue Albert Borschette, L-1246 Luxembourg. Commission and incentives may be paid and if so, would be included in the overall costs. Franklin Templeton Investment Funds ( FTIF ) are priced on a forward basis and prices are calculated daily. FTIF does not provide any guarantee either with respect to the capital or the return of a portfolio. FTIF is regulated in Luxembourg and the FTIF sub-funds available for public sale in South Africa are approved by the Financial Services Board. Investments in foreign securities may expose the fund to risks such as potential constraints on liquidity and repatriation of funds, macroeconomic, political, foreign exchange, tax, settlement and potential limitations on the availability of market information. For full information on all the risks applicable to this fund, please refer to the fund s prospectus. Franklin Templeton Investments SA (PTY) Ltd ( FTISA ) is an authorised Financial Services Provider. FTISA is a Member of the Association for Savings & Investment SA (ASISA). Copies of the latest prospectus, Minimum Disclosure Document (MDD) and the latest annual and semi-annual reports of FTIF are available on the website www.franklintempleton.co.za or may be obtained free of charge from Franklin Templeton International Services S.à r.l., 8A rue Albert Borschette, L-1246 Luxembourg or your local FTI representative. Performance is calculated as a lump-sum and is quoted in USD or in the base currency of the fund and its respective share classes currencies. Performance is calculated for the portfolio, individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestment and dividend withholding tax. Annualised performance is the fund s total return expressed as an annual equivalent percentage rate over the time period listed. 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. In emerging markets, the risks can be greater than in developed markets. Investments in derivative instruments entail specific risks that may increase the risk profile of the fund. Past performance is not an indicator or a guarantee of future performance. 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. In addition, it should not be assumed that any securities mentioned were or will prove to be profitable. 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. 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 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. 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. 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. 2. 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. 3. 2017 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. 4. 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. 5. 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 capitalisation figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. Source: Factset. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. Franklin Templeton Investments Kildare House The Oval, 1 Oakdale Road Newlands, Cape Town, 7700 South Africa Tel.: +27 (21) 831 7400 Fax.: +27 (21) 831 7422 www.franklintempleton.co.za 2017 Franklin Templeton Investments. All rights reserved.
6. The dividend yield quoted here is the yield on securities within the portfolio and should not be used as an indication of the income received from this portfolio. 7. 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. 8. Top Security Contributors and Top Security Detractors are holdings based on the last one month period for rolling months or on the last three months period for quarter end months. 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. 9. 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. 11. 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 Kildare House The Oval, 1 Oakdale Road Newlands, Cape Town, 7700 South Africa Tel.: +27 (21) 831 7400 Fax.: +27 (21) 831 7422 www.franklintempleton.co.za 2017 Franklin Templeton Investments. All rights reserved.