Templeton Global Bond Fund A (Mdis) USD Franklin Templeton Investment Funds Fund Manager Report Unconstrained Fixed Income Product Details 1 Fund Assets $16924578857.29 Fund Inception Date 28/02/1991 Number of Securities 177 Including Cash Bloomberg TEMGINI LX ISIN LU0029871042 Base Currency USD Investment Style Unconstrained Benchmark JP Morgan Global Government Bond Index Morningstar Category Global Bond Asset Allocation 2 % Fixed Income 82.99 Cash & Cash 17.01 Equivalents Overall Morningstar Rating TM 3 Fund Description The fund aims to maximise total investment return consisting of a combination of interest income, capital appreciation and currency gains by investing principally in a portfolio of fixed or floatingrate debt securities and debt obligations issued by government or government-related issuers worldwide. Key Points The yield on the 10-year US Treasury note continued to rise in February, ending the month at 2.86%. In emerging markets, yields rose across much of Latin America and Asia ex Japan, with a few notable exceptions such as Brazil. The euro weakened against the US dollar during the month, while the Japanese yen strengthened. Emerging-market currencies also broadly weakened against a moderately stronger US dollar during the month. For the month, the fund s negative absolute performance was primarily due to currency positions. Interest-rate strategies and sovereign credit exposures had largely neutral effects on absolute results. Interest-rate strategies contributed to the fund s relative performance, while currency positions and sovereign credit exposures had largely neutral effects. Performance Data Discrete Annual Performance (%) as at 28/02/2018 2/17-2/18 2/16-2/17 2/15-2/16 2/14-2/15 2/13-2/14 A (Mdis) USD 0.42 11.50-10.24 2.79-0.83 JP Morgan Global Government Bond Index USD 6.07-1.42 2.70-3.14 0.85 Performance Net of Management Fees as at 28/02/2018 (Dividends Reinvested) (%) 4 1 Mth 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception (28/02/1991) A (Mdis) USD -0.68-1.21 0.34 0.42 0.17 0.49 4.62 6.51 JP Morgan Global Government Bond Index -0.69 0.77 0.62 6.07 2.40 0.96 2.42 5.45 Calendar Year Returns (%) 4 2-2 16.35 6.83 2.20 4.35 1.57 1.15 0.67 1.21 1.30-5.43-2.61-4.50-3.14 18.81 11.66 12.00 7.22 6.42 7.36 1.90 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 A (Mdis) USD JP Morgan Global Government Bond Index Past performance is not an indicator or a guarantee of future performance. Portfolio Manager Insight Market Review The yield on the 10-year US Treasury (UST) note continued to rise in February, ending the month 16 basis points higher at 2.86%. Jay Powell was sworn in as the new US Federal Reserve (Fed) chairman on 5 February. There was no Fed meeting during the month, but fed funds futures at February-end indicated a likely rate hike at the Fed s upcoming 21 March meeting and two additional rate hikes later this year. During testimony to the US Congress, Powell indicated that quantitative easing (QE) reductions and anticipated rate hikes in 2018 would likely remain on 1. All holdings are subject to change.
course, but specified that policy adjustments would be data-dependent. Overall, we expect UST yields to continue rising as the Fed unwinds its balance sheet and tightens policy, while inflation pressures build on exceptional strength in the US labour market and resilient expansion of the US economy. In Europe, 10-year sovereign bond yields moderately declined in Germany and France while short-term yields remained negative. The euro weakened against the US dollar during the month we continue to expect the euro to depreciate on widening rate differentials between the rising yields in the US and the low to negative yields in the eurozone. European Central Bank (ECB) President Mario Draghi continued to indicate that monetary policy should remain accommodative in 2018, and that rates are not likely to rise until QE measures end. Currently, the ECB s bondbuying programme is scheduled to continue through at least September 2018, with the possibility of continuing at a reduced pace in subsequent months. We think the ECB will keep rates unchanged in 2018. We also continue to see ongoing risks to political cohesion across Europe as populist movements continue to influence the political discourse. In Germany, Angela Merkel agreed to a coalition government with the Social Democrats (SPD), but remained in a politically weakened position. The euro continues to be vulnerable to unresolved structural and political risks, in our view. In Japan, Prime Minister Shinzo Abe s political mandate has remained strong since his political coalition maintained its supermajority in the October 2017 elections. We expect Abenomics programmes to continue as planned with Abe s ongoing political strength. The Bank of Japan (BOJ) continued with its QE programme in February as short-term yields in Japan remained negative. Rising UST yields should produce a more effective environment for the BOJ to deploy additional monetary accommodation that weakens the yen, as it continues to target a 0. yield on the 10-year Japanese government bond. The Japanese yen strengthened against the US dollar in February; however, we expect it to weaken in upcoming quarters on widening rate differentials with the US. In emerging markets, yields rose across much of Latin America and Asia ex Japan, with a few notable exceptions such as Brazil. Emerging-market currencies broadly weakened against a moderately stronger US dollar in February, with notable depreciations in the Indonesian rupiah, Indian rupee, Argentine peso, Mexican peso and Brazilian real. Overall, we continue to see a number of local-currency markets that we believe remain undervalued, particularly in India, Indonesia, Mexico and Colombia. We also see attractive risk-adjusted yields in places like Brazil and Argentina. The impacts of rising rates in the US on emerging markets should vary from country to country, in our view. Several countries have significantly higher yields than the US Brazil has had around a 9.6% yield on 10-year bonds (as at ), Mexico around 7.7% and Indonesia around 6.8%. Countries with this type of yield advantage over USTs should fare better as the Fed unwinds its balance sheet; however, emerging markets with lower yields would likely be more vulnerable, particularly if the interest-rate differential flips. Overall, we see additional scope for currency appreciation and strengthening valuations in specific local-currency emerging markets, particularly in countries with economic resilience and relatively higher, maintainable rate differentials. Performance Review In February, the fund s negative absolute performance was primarily due to currency positions. Interest-rate strategies and sovereign credit exposures had largely neutral effects on absolute results. Amongst currencies, the fund s net-negative position in the Japanese yen detracted from absolute performance, while its net-negative positions in the euro and the Australian dollar contributed. Currency positions in Asia ex Japan (the Indian rupee and Indonesian rupiah) and Latin America (the Brazilian real and Mexican peso) detracted from absolute results. The fund maintained a defensive approach regarding interest rates in developed markets, while holding duration exposures in select emerging markets. Select duration exposures in Asia ex Japan (Indonesia) detracted from absolute performance, while negative duration exposure to USTs contributed. On a relative basis, interest-rate strategies contributed to the fund s performance, while currency positions and sovereign credit exposures had largely neutral effects. Underweighted duration exposure in the United States contributed to relative results, while select overweighted duration exposures in Asia ex Japan (Indonesia) detracted. Amongst currencies, the fund s underweighted position in the Japanese yen detracted from relative performance. Overweighted currency positions in Asia ex Japan (the Indian rupee and Indonesian rupiah) and Latin America (the Brazilian real and Mexican peso) also detracted from relative results. However, the fund s underweighted positions in the euro and the Australian dollar contributed to relative performance, as did its lack of exposure to the British pound. Portfolio Positioning During the month, we remained positioned in a number of emerging markets, with notable local-currency duration exposures in Brazil, Argentina, Colombia, Indonesia and India, and notable currency exposure to the Mexican peso. We eliminated our local-currency positions in South Africa in February. We continued to hold net-negative positions in the euro and Japanese yen based on our expectations for widening rate differentials with the US as the Fed tightens policy while the ECB and BOJ continue with monetary accommodation. The short positions in the euro and yen represent directional views on the currencies, as well as hedges against broad strengthening of the US dollar. The short euro position is also a hedge against eurosceptic political risks and unresolved structural risks in Europe. We also continued to hold net-negative positioning in the Australian dollar based on the Reserve Bank of Australia s accommodative rates, and as a partial hedge against potential economic risks in China and broad-based beta risk across emerging markets. In credit markets, we continued to see areas of value in some specific sovereign credits. We also remained positioned for rising yields by maintaining low overall portfolio duration and holding negative duration exposure to USTs through interest-rate swaps. Outlook & Strategy The US has seen some meaningful policy adjustments in recent months that we largely expect to accelerate economic growth. Investment activity had been stifled by regulations enacted after the global financial crisis in 2008 removing those bottlenecks through deregulation has incentivised new investment across a number of sectors. Additionally, tax reform enacted in December and the likely repatriation of assets should further boost economic growth. However, steel and aluminium tariffs should raise costs for consumers. The greater risk from tariffs is the potential for provoking trade wars, particularly if tariffs expand to other sectors. Our main concern is that an aggressive retaliatory trade war with China would damage global growth. Overall, we continue to have a positive outlook for US growth and the global economy for 2018, but we continue to watch for potential economic disruptions. One of the trade-offs of tax reform was the likelihood that it will increase the deficit, which raises the borrowing needs of the government. Concurrently, the Fed is no longer funding the deficit through its QE program and is instead reducing its UST holdings. Rising deficits and diminished bond-buying from the Fed should pressure UST yields higher, in our view. We expect the glide path of monetary policy to remain largely unchanged in 2018, under the new Fed chairmanship of Jay Powell. The pace of balance sheet unwinding and expected rate hikes this year are likely to stay on the course outlined by the previous committee, in our view. The reduction of the Fed s balance sheet will be a significant change factor for bond markets in the upcoming year we think those effects are being underappreciated by markets and that USTs remain overvalued. On the whole, we continue to expect inflation pressures to rise with resilience in the US economy and exceptionally strong US labour markets. We have seen wage pressures pick up in specific pockets of the economy, and we expect those pressures to accelerate. Policy constraints on immigration have also been pressuring wages in various labour sectors. Additionally, financial sector deregulation has the potential to accelerate franklintempleton.lu 2
credit activity, stimulate investment and accelerate the velocity of money, which would further drive inflation. Fiscal expansion and the effects of tax reform can similarly add to the inflation dynamics. Overall, we see preconditions for rising inflation over the next couple years, which should pressure yields higher. In the major developed economies, we anticipate continued monetary accommodation and low rates in Japan and the eurozone while rates rise in the US those increasing rate differentials should depreciate the yen and euro against the US dollar, in our opinion. With the recent upturns in global growth and the rallies in risk assets, there should be less demand for perceived safe-haven assets, yet the yen has strengthened that trend is inconsistent with historical correlations, in our assessment, and we expect it to reverse on stronger global growth and rising rates in the US. Additionally, we expect the BOJ s current monetary stance to remain largely unchanged in the upcoming year. With yields rising in the US, the rate differentials with Japanese government bonds should widen, which should ultimately flow through to the exchange rate, weakening the yen and strengthening the US dollar. Additionally, a large part of the recent strength in the euro has been driven by optimism in Europe. Yet the economy still needs accommodative monetary policy (according to the ECB), and inflation has remained persistently subdued, below the ECB s target. We expect widening rate differentials with the US to fundamentally weaken the euro and pull the US dollar stronger. We have recently focused on countries that are less externally vulnerable and more domestically driven, and that have demonstrated their resilience to potential increases in trade costs. Select emerging markets that have higher rate environments and domestically oriented economies are likely to fare better in a rising-rate environment than countries with low yields and more externally driven economies, in our view. In Asia, we currently prefer countries with strong domestic drivers that are less leveraged to China, such as India and Indonesia, while we have moved away from economies that are more externally dependent, such as Malaysia. In Latin America, we are focused on countries that have turned away from previous failed experiments with populism, such as Brazil and Argentina, and are now moving towards more orthodox policies with credible monetary policy, proactive business environments and outward-looking trade. We also see attractive valuations in countries like Mexico and Colombia that have maintained sound policy discipline while broadening their economies beyond commodities. China s economy remains in a soft landing, but ongoing rebalancing is needed for the long term. The near-term picture looks fairly stable, in our assessment, but we have concerns for two or three years down the road as China s pace of growth now depends on almost five times as much credit to generate one unit of gross domestic product as it took in the surge of post-global financial crisis growth, starting in 2009. The Chinese authorities appear aware of this, but it remains to be seen if they can effectively manage a slowdown in credit. We have seen a number of policies wind down, but we do not expect a hard landing at this point. However, if China has not reduced its credit dependence in a couple years and we get an exogenous shock, such as an eventual recession in the US, then China s ability to intervene to stimulate its economy will be substantially less effective than it was during the last US recession. These risks warrant ongoing monitoring, but the near-term picture appears to support a continued moderation in growth and not a hard landing. Our philosophy is grounded in a focus on long-term fundamentals and patience. We believe that while markets can deviate from fundamentals in the shorter term, they tend to reflect them over the medium to long term. Thus we seek to identify and exploit the imbalances we see in the market and position for the directional trends we see going forward, ahead of inflection points. Our oftentimes contrarian viewpoint also allows us to find potential investment opportunities particularly during periods of volatility and panic, where we can exploit market mispricing. Portfolio Characteristics 5 JP Morgan Global Government Bond Portfolio Index Yield to Maturity 7.91% 1.44% Yield to Worst 7.91% 1.45% Average Duration -0.72 Yrs 7.89 Yrs Average Credit Quality 6 BBB+ AA Average Weighted Maturity 3.00 Yrs 9.86 Yrs 6. The average credit quality (ACQ) rating may change over time. The portfolio itself has not been rated by an independent rating agency. The letter rating, which may be based on bond ratings from different agencies, is provided to indicate the average credit rating of the portfolio s underlying bonds and generally ranges from AAA (highest) to D (lowest). The ACQ is determined by assigning a sequential integer to all credit ratings AAA to D, taking a simple, asset-weighted average of debt holdings by market value and rounding to the nearest rating. The risk of default increases as a bond s rating decreases, so the ACQ provided is not a statistical measurement of the portfolio s default risk because a simple, weighted average does not measure the increasing level of risk from lower rated bonds. The ACQ is provided for informational purposes only. Derivatives are excluded from this breakdown. franklintempleton.lu 3
Portfolio Diversification Geographic Allocation 2 48.53 NON-US 43.71 Mexico 19.98 Brazil Colombia Argentina Peru 0.55 USA 4.82 36.44 South Korea 16.17 Indonesia India 8.87 Philippines MIDDLE-EAST/AFRICA EUROPE SUPRANATIONAL 1.06 0.56 ST CASH & CASH EQUIVALENTS 12.67 OTHER -1.30-1 1 2 3 4 5 6 Geographic Weightings vs. JP Morgan Global Government Bond Index 2 8.21 NON-US 42.32 Mexico Brazil 19.98 Colombia Argentina Peru 0.55 USA -34.12 14.35 EX-JAPAN 34.77 South Korea Indonesia India 16.17 8.87 Philippines MIDDLE-EAST/AFRICA EUROPE -36.52 NON-EMU EUROPE -6.98 Ukraine SUPRANATIONAL 1.06 0.56 ST CASH & CASH EQUIVALENTS 12.67 OTHER -1.30-5 -25% 25% 5 75% Currency Allocation 2 Currency Weightings vs. JP Morgan Global Government Bond Index 2 US-DOLLAR NON US-DOLLAR Mexican Peso Brazilian Real Colombian Peso Argentine Peso Peruvian Nuevo Sol MIDEAST/AFRICA EX-JAPAN Indian Rupee Indonesian Rupiah Philippine Peso South Korean Won Australian Dollar JAPANESE YEN EUROPE 44.28 20.54 0.55-27.31 13.55 13.04-0.20-10.69-40.86-43.78-8 -6-4 -2 2 4 6 8 124.78 10 12 14 16 18 20 169.06 US-DOLLAR NON US-DOLLAR Mexican Peso Brazilian Real Colombian Peso Argentine Peso Peruvian Nuevo Sol MIDEAST/AFRICA EX-JAPAN Indian Rupee Indonesian Rupiah Philippine Peso South Korean Won Australian Dollar JAPANESE YEN EUROPE EURO -125% -49.40-61.28-81.37-73.33-10 -75% -5-25% 42.88 20.54 0.55 11.88 13.04-0.20-12.36 25% 5 75% 85.84 10 125% 128.73 15 franklintempleton.lu 4
Sector Weightings vs. JP Morgan Global Government Bond Index 2 Credit Quality Ratings 7 Local Currency Government/Agency Bonds - Investment Grade Local Currency Government/Agency Bonds - Non-Investment Grade 20.63 61.56 61.06 AAA AA+ AA 0.52 5.23 15.00 Non-Local Currency Sovereign Bonds - Non-Investment Grade US Treasuries/Agencies 1.06 38.94 A- BBB BBB- 19.05 18.47 Derivatives -0.82 BB- B 4.23 12.99 Supranational 0.56 B- 2.88 Templeton Global Bond Fund Cash & Cash Equivalents -1 1 2 3 4 5 6 7 17.01 JP Morgan Global Government Bond Index NR 0.03 Cash & Cash Equivalents 17.01 5% 1 15% 2 25% Investment Grade Non-Investment Grade Cash & Cash Equivalents Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) Templeton Global Bond Fund 6.74 6.12 8.27 7.24 JP Morgan Global Government Bond Index 5.44 5.08 6.30 6.28 Tracking Error (%) 1 8.44 9.09 6.72 Information Ratio 9-0.22-0.06 0.24 0.16 Sharpe Ratio Templeton Global Bond Fund -0.05 0.03 0.52 0.53 JP Morgan Global Government Bond Index 0.35 0.13 0.34 0.45 Investment Philosophy Beliefs and Guiding Principles An unconstrained approach to global fixed income investing can lead to long-term value potential Integrating global macroeconomic analysis with in-depth country research can help identify long-term economic imbalances Actively allocating risk across three independent potential sources of alpha can deliver diversification benefits and the potential for more consistent returns in diverse markets 8. Information Ratio and Tracking Error information are displayed for the product versus the JP Morgan Global Government Bond Index. franklintempleton.lu 5
Investment Process Multiple Research Lenses Can Lead to High-Conviction Opportunities 10,11 Global Research Lenses Macro Models/Analysis Three Potential Sources of Alpha Yield Curve Ideas Portfolio Construction and Implementation Risk Modelling VaR Analysis Correlation Analysis Scenario/Stress Testing In-Depth Country Analysis Currency Ideas Identification of High-Conviction Opportunities Management Team Potential Return vs. Expected Risk Global Allocations P O R T F O L I O Local Asset Management Perspective Review Sovereign Credit Ideas Review Trading Trade Structuring Market Flows Local Execution/Settlement Liquidity Analysis Review/ Performance Attribution 10. 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. 11. The Local Asset Management Group is comprised of investment professionals located in affiliates of and joint venture partners with Franklin Templeton Investments. Investment Team Portfolio Manager Years with Firm Years Experience Michael Hasenstab, Ph. D., Executive VP & Chief Investment Officer 19 23 Sonal Desai, Ph. D., Senior VP, Portfolio Manager, Director of Research 8 24 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 debt securities issued by government or government-related entities in any country and in derivatives. Such securities and derivatives have historically been subject to price movements, generally due to interest rates, foreign exchange rates or movements in the bond market. As a result, the performance of the Fund can fluctuate over time. The Fund may distribute income gross of expenses. Whilst this might allow more income to be distributed, it may also have the effect of reducing capital. Other significant risks include: credit risk, currency risk, derivatives risk, liquidity risk, emerging markets 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. franklintempleton.lu 6
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. Securities mentioned in this report are not a solicitation to purchase those securities, and are examples of some securities which performed well. Not all securities in the portfolio performed well. 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. 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. 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. Important data provider notices and terms available at: www.franklintempletondatasources.com 2. Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 10 or may be negative due to rounding, use of derivatives, unsettled trades or other factors. Information is historical and may not reflect current or future portfolio characteristics. 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. Yield to Maturity, Yield to Worst, Average Duration and Average Weighted Maturity reflect certain derivatives held in Portfolio (or their underlying reference assets). 7. Ratings shown are assigned by one or more Nationally Recognized Statistical Rating Organizations ( NRSRO ), such as Standard & Poor s, Moody s and Fitch. The ratings are an indication of an issuer s creditworthiness and typically range from AAA or Aaa (highest) to D (lowest). When ratings from all three agencies are available, the middle rating is used; when two are available, the lowest rating is used; and when only one is available, that rating is used. Foreign government bonds without a specific rating are assigned the country rating provided by an NRSRO, if available. If listed, the NR category consists of rateable securities that have not been rated by an NRSRO. The N/A category consists of nonrateable securities (e.g., equities). Cash includes equivalents, which may be rated. Derivatives are excluded from this breakdown. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 9. 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.