Franklin European Growth Fund A (acc) EUR Franklin Templeton Investment Funds Fund Manager Report Blend Equity Product Details 1 Fund Assets 575238334.43 Fund Inception Date 29/12/2000 Number of Issuers 33 Bloomberg ISIN Base Currency Investment Style Benchmark Overall Morningstar Rating TM 3 FRAEGFA LX LU0122612848 EUR Blend Morningstar Category Europe Flex-Cap Equity Asset Allocation 2 % Equity 100.72 Cash & Cash -0.72 Equivalents Fixed Income Fund Description The fund aims to achieve long-term capital appreciation by investing principally in equity and/or equity-related securities of companies of any market capitalisation in European countries. Key Points European equity markets rose in the fourth quarter. A continued improvement in the regional economy and solid corporate earnings helped underpin markets even as inflation remains stubbornly low. The fund outperformed its benchmark as strong stock selection in financials along with an overweight in energy contributed to relative returns. Security selection in industrials and materials curbed relative performance. Performance Data Discrete Annual Performance (%) as at 31/12/2017 12/16-12/17 12/15-12/16 12/14-12/15 12/13-12/14 12/12-12/13 A (acc) EUR 7.22 4.12 6.67-2.55 24.61 MSCI Europe Index EUR 10.88 3.22 8.78 7.40 20.51 Performance Net of Management Fees as at 31/12/2017 (Dividends Reinvested) (%) 4 1 Mth 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception (29/12/2000) A (acc) EUR 0.96 0.78 7.22 7.22 5.99 7.66 6.52 3.10 MSCI Europe Index 0.81 0.67 10.88 10.88 7.58 10.02 3.99 3.46 Calendar Year Returns (%) 200% 100% 0% -100% 49.91 24.61 25.08 7.22 10.88 4.12 6.67 2 3.22 8.78 7.40 20.51 18.09 11.75 32.55-2.55-7.29-7.51-37.63-43.29 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 A (acc) EUR Past performance is not an indicator or a guarantee of future performance. Portfolio Manager Insight Market Review European equity markets rose in the fourth quarter. A continued improvement in the regional economy and solid corporate earnings helped underpin markets even as inflation remains stubbornly low. Economic data from across the region continued to indicate that growth has become more durable, even if inflation remains low. Economic confidence has improved, manufacturing activity has picked up, and loan growth is gaining steam. Better emerging-market growth also was a positive for the region s exporters. The improving regional growth also gave central banks the leeway to move away from extraordinarily loose policy. The US Federal Reserve (Fed) began reducing its balance sheet during the quarter and raised interest rates in December. The Fed anticipates a few more rate hikes in 2018 as the US economy continues to grow. The European Central Bank (ECB), meanwhile, announced that it would halve its monthly asset purchases to 30 billion starting in January 2018, but would extend its bond-buying through September as it waits for inflation to pick up. 1. All holdings are subject to change. Holdings of the same issuers have been combined.
On the political front, German Chancellor Angela Merkel hit a stumbling block in forming a new coalition, but talks continue with other major German political parties. Meanwhile, the United Kingdom appeared to reach a deal to honour its financial commitments to the European Union, which may allow Brexit talks to move onto trade and other issues. Oil prices rose during the quarter on expectations the Organization of the Petroleum Exporting Countries would extend production cuts through next year. Performance Review During the quarter, the fund outperformed its benchmark as strong stock selection in financials along with an overweight in energy contributed to relative returns. Security selection in industrials and materials curbed relative performance. Amidst the rebound in oil prices in the fourth quarter, a number of energy holdings contributed to relative performance. Amongst them was UK-based oilfield services firm Hunting. Given its industry-leading position in providing specialist tools to the exploration and production industry, we expect Hunting to grow alongside an ongoing increase in US shale production and an eventual pickup in offshore production should oil prices normalise over the longer term. Offshore products also tend to be highly customised and higher margin. Austrian company Schoeller-Bleckmann Oilfield Equipment, which makes high-precision components and oilfield equipment, was another one of the standouts. The company s mission-critical components that are integral to the drilling process and its market leading position in its core products of collars and motors are competitive advantages, in our view. And we expect that depletion from existing oil wells should force oil companies to eventually start spending more on extracting oil using more complex techniques. In financials, UK-based emerging-markets debt manager Ashmore Group supported relative performance on strong inflows as sentiment towards emerging markets in general improved over the course of 2017. Ashmore has a strong product line-up, and the company s high level of institutional clients has helped to limit outflows in recent years. Additionally, we believe Ashmore s strong balance sheet and low fixed costs could support margins and cash flows. FinecoBank was also a contributor in the sector. As Italy s only truly multi-channel bank that offers both a strong digital platform and personal investment advice, FinecoBank could benefit from the digitalisation of financial services and open-architecture, fee-based investment advice. We believe the structural weakness of the Italian banking sector actually helps FinecoBank, since it creates an opportunity for potential disruptors. In the consumer staples sector, Scandinavian Tobacco Group, a Denmark-based cigar manufacturer, contributed to relative performance as the company continued to bounce back from recent issues with its US distribution operations. We believe Scandinavian Tobacco Group could continue to offset declining volumes with price increases, and it has continued to generate significant free cash flow. Conversely, UK-based social housing provider Mears Group weighed on relative returns in the industrials sector. The company has been weak alongside other support services companies amidst concerns about a higher minimum wage and government pressure on contracts, which have left some companies with loss-making contracts. France-based industrials stock SPIE, a provider of multi-technical services in the areas of energy and communications, detracted from relative returns. We believe the company is well positioned as growth has continued to improve in France and if the energy markets eventually recover alongside a pickup in oil prices. Additionally, we believe the secular trend towards improving energy efficiency should be beneficial for the company over the longer term. Sbanken (formerly Skandiabanken), a Norway-based internet bank, detracted from relative returns in the financials sector. Nonetheless, Sbanken has benefitted from strong loan demand. The bank offers a wide range of banking services throughout Norway, and we believe its strong reputation as a bank that offers simple products at cheap prices with good customer service sets it apart from more traditional lenders. In materials, UK-based performance materials manufacturer Low & Bonar undermined relative performance. The company issued a profit warning in December and announced that its chief executive was leaving. Nonetheless, we expect Low & Bonar s growth to be underpinned by structural trends such as the move towards cost-efficient carpet tiles, better thermal and acoustic isolation in buildings, and global trade and infrastructure projects driven by urbanisation. While the company also manufactures some commodity products, it is placing greater emphasis on higher-margin specialty products. Sanofi, a French pharmaceutical company, curbed relative performance in health care amidst ongoing concern about weakness in its diabetes franchise, as its Lantus drug has lost US patent protection and faces increased competition from generic alternatives. We anticipate recently launched drugs and its pipeline should help offset some of the declines in the diabetes franchise over time. Portfolio Positioning We utilise a bottom-up, long-term strategy, and therefore try to take advantage of market volatility to gain exposure to companies that exhibit what we view as strong and sustainable competitive advantages, solid balance sheets and substantial cash generation. We tend to be contrarian in our style, and our philosophy and process often lead us to segments of the market that are out of favour with other investors. Outlook & Strategy We believe that for the first time since the 2007 2009 global financial crisis, the European economy appears strong enough to stand on its own, no longer in need of massive central bank support. And with corporate profits still well below their previous peaks and valuations as of year-end looking fair given the more promising economic environment, European equities look to us to be potentially poised for another solid year in 2018. A combination of factors is behind the brighter outlook for most European economies, including robust domestic consumption, an end to fiscal austerity and improving credit conditions. Inflation has remained low, but we expect an eventual pickup as the recovery progresses. As inflation begins to rise, we anticipate earnings per share, particularly amongst the more cyclical areas of the market, would likely follow suit over the next few years. We continue to see opportunities in Europe, but we expect stockpicking to become ever more important in 2018. One-Month Performance Review In December, the fund outperformed its benchmark helped by strong stock selection in the financials sector. Security selection in industrials detracted from relative returns. Amongst the contributors were Hunting and Schoeller-Bleckmann Oilfield Equipment in the energy sector. Francebased consumer discretionary stock Maisons du Monde, a home goods retailer, and Scandinavian Tobacco Group also supported relative performance. In financials, Ashmore Group supported relative performance. Detractors included UK-based oilfield services company John Wood Group and TGS-Nopec Geophysical Co., a Norway-based geosciences data provider. SPIE and Low and Bonar also detracted from relative performance. Italian asset gatherer Banca Generali pressured relative returns in the financials sector. franklintempleton.lu 2
Portfolio Characteristics 5 Portfolio Market Capitalisation (Millions in EUR) 24,603 56,587 Price to Earnings Growth Ratio 1.46x 1.23x 3-Year Sales Growth 2.28% 1.60% Estimated 3-5 Yr EPS Growth 12.28% 13.72% Price to Earnings (12 Month Forward) 17.42x 16.09x Portfolio Diversification Top Sector Contributors 6 Total Sector Effect (%) Financials 0.92 Energy 0.62 Consumer Staples 0.34 Consumer Discretionary 0.21 Utilities 0.14 Top Sector Detractors 6 Total Sector Effect (%) Industrials -0.65 Materials -0.61 Health Care -0.22 Real Estate -0.08 Information Technology -0.05 Top Security Contributors 6,7 Security Total Effect (%) HUNTING PLC 0.76 BERNDORF AG 0.68 ASHMORE GROUP PLC 0.64 FINECOBANK BANCA FINECO SPA 0.35 SCANDINAVIAN TOBACCO GROUP 0.32 A/S Contributors/detractors data shown is for the period from 01/10/2017 to 31/12/2017. Past performance is not an indicator or a guarantee of future performance. Geographic Weightings vs. 2 United Kingdom 32.87 28.02 France 16.86 16.79 Italy 14.09 3.68 Spain 10.08 5.06 Switzerland 7.02 12.64 Germany 5.50 15.46 Netherlands 3.91 5.61 Denmark 3.67 2.87 Austria 3.51 0.40 Norway 3.02 1.04 Sweden 0.19 4.23 Cash & Cash Equivalents -0.72-25% 0% 25% 50% Top Security Detractors 6,7 Security Total Effect (%) MEARS GROUP PLC -0.46 SBANKEN ASA -0.38 LOW & BONAR PLC -0.34 SANOFI -0.32 SPIE SA -0.27 Sector Weightings vs. 2 Industrials 22.82 13.17 Financials 21.32 20.98 Health Care 14.40 12.20 Energy 14.23 7.35 Consumer Discretionary 13.71 10.54 Consumer Staples 7.23 13.72 Materials 3.96 8.35 Information Technology 3.05 4.99 Telecommunication Services 3.77 Real Estate 1.36 Utilities 3.57 Cash & Cash Equivalents -0.72-5% 0% 5% 10% 15% 20% 25% 30% Franklin European Growth Fund Franklin European Growth Fund franklintempleton.lu 3
Top Ten Holdings 8 Top Holdings Sector Country % ROCHE HOLDING AG Pharmaceuticals, Biotechnology & Life Switzerland 5.30 Sciences SHIRE PLC Pharmaceuticals, Biotechnology & Life United Kingdom 4.24 Sciences BANCA GENERALI SPA Diversified Financials Italy 4.07 HUNTING PLC Energy United Kingdom 4.05 JOHN WOOD GROUP PLC Energy United Kingdom 3.99 ASHMORE GROUP PLC Diversified Financials United Kingdom 3.93 ASR NEDERLAND NV Insurance Netherlands 3.91 SPIE SA Commercial & Professional Services France 3.74 IMI PLC Capital Goods United Kingdom 3.72 SCANDINAVIAN TOBACCO GROUP A/S Food Beverage & Tobacco Denmark 3.67 Supplemental Performance Statistics Supplemental Risk Statistics 9 Standard Deviation (%) 3 Yrs 5 Yrs 10 Yrs Since Inception Franklin European 12.33 11.20 13.60 15.15 Growth Fund 12.91 11.32 15.27 15.16 Tracking Error (%) 4.90 5.33 7.03 6.34 Information Ratio 10-0.33-0.45 0.36-0.06 Beta 0.86 0.86 0.79 0.91 Sharpe Ratio Franklin European 0.53 0.71 0.45 0.11 Growth Fund 0.63 0.91 0.24 0.13 10-Years Risk vs. Return Return (%) 8 6 4 2 0 0 5 10 15 20 Risk (Standard Deviation) (%) Franklin European Growth Fund Investment Team Portfolio Manager Years with Firm Years Experience Robert Mazzuoli, CFA, Portfolio Manager 7 15 Dylan Ball, EVP, Portfolio Manager, Research Analyst 10 18 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 equity and equity-related securities of companies of any market capitalisation located in or doing significant business in European countries. Such securities have historically been subject to significant price movements that may occur suddenly due to market or company-specific factors. As a result, the performance of the Fund can fluctuate considerably over time. Other significant risks include: currency risk, credit 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. 9. Beta, Information Ratio and Tracking Error information are measured against the. franklintempleton.lu 4
Important Legal Information This document does not constitute legal or tax advice nor is it investment advice or an offer for shares of Franklin Templeton Investment Funds (the Fund ). Subscriptions to shares of the Fund can only be made on the basis of the current prospectus and, where available, the relevant Key Investor Information Document, accompanied by the latest available audited annual report and the latest semi-annual report accessible on our website www.ftidocuments.com or which can be obtained, free of charge, from Franklin Templeton International Services, S.à r.l. - 8A, rue Albert Borschette, L-1246 Luxembourg. 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, 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. 2018 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. The Estimated 3-5 Year EPS Growth uses simple weighted average means. There can be no assurance that the Estimated 3-5 Year EPS Growth will be realised. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 6. 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. 7. 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. 8. 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. Franklin Templeton International Services, S.à r.l. 8A, rue Albert Borschette L-1246 Luxembourg franklintempleton.lu 2018 Franklin Templeton Investments. All rights reserved.
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 International Services, S.à r.l. 8A, rue Albert Borschette L-1246 Luxembourg franklintempleton.lu 2018 Franklin Templeton Investments. All rights reserved.