Franklin K2 Long Short Credit Fund. Advisor Class

Franklin K2 Long Short Credit Fund Advisor Class Multi Strategy Alternatives Product Profile Product Details Fund Assets $88,117,929.04 Fund Inception Date 09/08/2015 Investment Style Multi Strategy Benchmark HFRX Fixed Income - Credit Index;BofA Merrill Lynch US 3-Month Treasury Bill Index Lipper Classification Alternative Credit Focus Funds Morningstar Category Long-Short Credit Dividend Frequency Annually in December CUSIP NASDAQ Symbol Advisor Class 352 41W 823 FKLZX Advisor Class Maximum Sales Charges None Total Annual Operating Expenses 1 Management Fee 1.90% Div. Expense and 0.76% Borrowing Fees for Securities Sold Short Additional Expenses 0.66% Without Waiver 3.32% With Waiver 2.74% Fund Description The fund seeks total return over a complete market cycle (through a combination of current income, capital preservation and capital appreciation), by allocating its assets across multiple alternative fixed income and credit strategies. Performance Data 2 Average Annual Total Returns 3 (%) Since Inception 3 Mths YTD 1 Yr (09/08/2015) Advisor Class 0.48 0.48 3.95 5.48 BofA Merrill Lynch US 3-0.35 0.35 1.11 0.62 Month Treasury Bill Index HFRX Fixed Income - Credit -0.39-0.39 2.27 1.65 Index 10% 5% 0% -5% 5.48 3.95 2.27 0.48 0.35 0.48 0.35 1.11 1.65 0.62-0.39-0.39 3 Mths YTD 1 Yr Since Inception Advisor Class BofA Merrill Lynch US 3-Month Treasury Bill Index HFRX Fixed Income - Credit Index Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/342-5236 or visit franklintempleton.com for the most recent month-end performance. Advisor Class shares are offered only to certain eligible investors as stated in the prospectus. They are offered without sales charges or Rule 12b-1 fees. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. The fund has an expense reduction contractually guaranteed through 09/30/2018. Fund investment results reflect the expense reduction ( Total Annual Operating Expenses with Waiver ); without this reduction, the results would have been lower. Total Annual Operating Expenses with Waiver represents the expense ratio applicable to investors. Div. Expense and Borrowing Fees for Securities Sold Short: Costs associated with the fund s short positions. The fund s manager and sub-advisors use short positions in an attempt to either protect against losses or provide an additional source of returns versus long-only strategies. There is no guarantee that these positions will perform as the fund s manager or sub-advisors intend, and losses may occur. Additional Expenses: Includes distribution and service (12b-1) fees; acquired fund fees and expenses; and other expenses of the fund or the subsidiary. Calendar Year Returns (%) 2017 2016 Advisor Class 4.97 8.21 BofA Merrill Lynch US 3-Month Treasury Bill Index 0.86 0.33 HFRX Fixed Income - Credit Index 3.87 4.97 2. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Unlike most asset class indexes, HFR Index returns reflect fees and expenses. 3. Periods shorter than one year are shown as cumulative total returns. Not FDIC Insured May Lose Value No Bank Guarantee

Portfolio Manager Insight 4 Market Review During the first quarter, the US Federal Reserve raised the federal funds target rate 25 basis points (bps) to a range of 1.50% to 1.75% at its March meeting. Despite a decline in the 10-year US Treasury note s yield during the final week of March, the yield was still 33 bps higher year-to-date in 2018 (through March 31). Uncertainty over the potential impacts of protectionist trade policies appeared to drive some risk aversion in the markets; however, US economic resilience and growing inflation pressures are expected to continue in 2018. In Europe, the yield on the 10-year German Bund moderately rose, while short-term yields in the eurozone remained negative. European Central Bank President Mario Draghi has continued to indicate that monetary policy will remain accommodative in 2018, and that rates are not likely to rise until quantitative easing measures end. The Bank of Japan continued with its quantitative easing program during the quarter as short-term yields in Japan remained negative. In emerging markets, yields broadly rose across Asia ex-japan and declined across much of Latin America. Performance Review The fund s positive performance, both overall and on an individual strategy basis, defied the drawdowns that affected many bond sectors amid rising interest rates. Structured credit led performance among strategies, followed by long short credit and emerging market credit. All but one of the subadvisors benefited returns, led by Ellington in structured credit. Apollo in long short credit was the only subadvisor to weigh on results. Overall, agency mortgage-backed securities (MBS), equity index hedges, and health care positions lifted performance. Conversely, certain currency positions and the energy sector curbed returns. Credit Long Short Chatham, one of two long short credit strategy subadvisors, strengthened performance and led the strategy to an overall small gain in the first quarter. In contrast, Apollo weighed on results. On a strategy level, portfolio hedges in equity and fixed income indexes, and the health care sector benefited returns. One of the top contributors for Chatham were bonds issued by a newspaper publisher that reported strong net earnings and announced additional asset sales with the objective of retiring debt. In contrast, energy, real estate and some currency positions hindered performance. Apollo holds long exposure to energy-related master limited partnerships, and these entities sold off following a US ruling that would no longer allow interstate natural gas and oil pipelines to recover an income tax allowance in cost of service rates. Apollo believes the market has over-reacted, and that one of the detractors had minimal exposure to natural gas pipelines. The subadvisor also sees strong fundamentals and attractive valuations for these partnerships. Structured Credit Net interest from MBS and asset-backed securities (ABS) led both structured credit subadvisors to first-quarter gains. Ellington was top performer among subadvisors. The subadvisors noted fundamentals remained strong in residential MBS. Although most positions benefited results, a fixed-rate franchise loan bond backed by a restaurant company had a mark-to-market loss amid rising interest rates. Emerging-Markets Fixed Income Discretionary subadvisor Emso s gain in the first quarter was supported by positioning in local currency government bonds. For example, currencyhedged long positions in South African local debt benefitted returns, with notable appreciation after corruption-plagued President Jacob Zuma was forced out as head of his party in mid-february. High-yielding local debt in Egypt also contributed strongly during the quarter, driven by strong income and supported by a stable currency as the country continued to make progress under an International Monetary Fund program. Conversely, long exposure to hard currency debt in Argentina weighed on results after the central bank changed its inflation target in December 2017. Portfolio Positioning Fund positioning was largely unchanged in the first quarter. Subadvisors continued to use a combination of cash instruments and derivatives to express both directional views and for hedging purposes, depending on where they believed liquidity and pricing was most favorable. Outlook & Strategy As we entered the second quarter of 2018, we remain positive on long short credit. With interest rates finally starting to rise, credit market participants are paying more attention to duration risk. We believe the fund s long short credit subadvisors are well positioned, given their shorter duration portfolios, and offer compelling performance potential amid rising bond sector dispersion. In structured credit, fundamentals generally remain strong, particularly in residential MBS and consumer ABS, with a supportive US economy and increased certainty surrounding cash flows due to borrower seasoning. We also found yields in these bond sectors attractive relative to other ones. 4. 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. Manger Allocations 5 % of Invested Credit Long Short Capital Chatham Asset Management, LLC 20.62 Apollo Credit Management, LLC 22.32 % of Invested Emerging Market Fixed Income Capital Emso Asset Management Limited 19.47 5. Source: HedgeMark. Weightings as a percent of invested capital into fund managers (sub-advisors or co-managers). Percentage may not equal 100% due to rounding. Manager allocation includes managers that have been appointed as sub-advisors or managers of investment funds. K2 may determine in its sole discretion to not allocate to one or more of the managers and/or to add new managers. Accordingly, the allocation is presented for illustrative purposes only, and should not be viewed as predictive of the ongoing composition of the Fund s portfolio (and it s managers), which may change at any time. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. franklintempleton.com 2

% of Invested Structured Credit Capital Candlewood Investment Group, L.P. 18.12 Ellington Global Asset Management, LLC 19.48 Portfolio Characteristics Portfolio Exposure 6 % Long Exposure 92.78 Net Exposure 66.85 Short Exposure -25.93 Gross Exposure 118.71 Portfolio Diversification Strategy Allocation 7 Percent of Invested Capital Target (%) % Credit Long Short 30-70 42.94 Structured Credit 20-60 37.59 Emerging Market Fixed 0-30 19.47 Income Historical Strategy Allocation 8 Percent of Invested Capital 125 100 75 50 25 0 12/31/2015 03/31/2016 06/30/2016 09/30/2016 12/31/2016 03/31/2017 06/30/2017 09/30/2017 12/31/2017 03/31/2018 Emerging Market Fixed Income Structured Credit Credit Long Short Security Type Exposure (Gross) 9 % Direct Securities 67.63 Index/Multi-Security Derivatives 34.74 Single Security Derivatives 16.34 Security Type Exposure (Net) 10 % Single Security Derivatives -7.67 Direct Securities 41.12 Index/Multi-Security Derivatives 33.40 6,9,10. Source: HedgeMark. Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% 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. 7. Source: HedgeMark. Actual Allocation is a percentage of invested capital into fund managers (sub-advisors or co-advisors) as of the end of the period. Percentage may not equal 100% due to rounding. Target Allocations are as of the end of the period. The Fund may shift allocations among strategies at any time. K2 may determine in its sole discretion to not allocate to one or more of the strategies and/or to add new strategies. Accordingly, the Target Allocations are presented for illustrative purposes only, and should not be viewed as predictive of the ongoing composition of the Fund s portfolio (and it s managers), which may change at any time. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 8. Source: HedgeMark. Weightings as percent of invested capital into fund managers (sub-advisors or co-managers). Percentage may not equal 100% due to rounding. The Fund may shift allocations among strategies at any time. Further, K2 may determine in its sole discretion to not allocate to one or more of the strategies and/or to add new strategies. Accordingly the above target allocations are presented for illustrative purposes only, and should not be viewed as predictive of the ongoing composition of the fund s portfolio (and its managers), which may change at any time. franklintempleton.com 3

Sector Exposure 11 Net Exposure Long Exposure Short Exposure Europe -7.02 3.74-10.77 Equity 0.40 0.43-0.03 High Yield Corporates -0.76 2.60-3.36 Credit Default Swaps / Credit Default Swap Index 0.19 0.29-0.10 Currencies -2.01 - -2.01 Government -3.48 - -3.48 Investment Grade Corporates -1.36 0.42-1.78 Global and Emerging Markets 9.57 13.52-3.94 Equity 0.19 0.22-0.03 Currencies -1.71 0.50-2.21 Credit Default Swaps / Credit Default Swap Index 1.10 1.10 - Emerging Market Corporates 2.71 3.47-0.76 Emerging Market Sovereign 4.87 4.87 - Government 2.42 3.37-0.95 North America 64.66 75.52-10.86 Credit Default Swaps / Credit Default Swap Index 0.03 0.43-0.40 Residential Mortgage Backed Securities 23.00 23.00 - Government 1.42 2.46-1.04 Currencies -0.07 - -0.07 High Yield Corporates 24.37 30.33-5.96 Equity 4.61 5.93-1.32 Asset-Backed Securities 3.72 3.72 - Investment Grade Corporates 0.18 2.24-2.06 Emerging Market Corporates 0.38 0.38 - Commercial Mortgage Backed Securities 7.02 7.02 - Asia Pacific -0.37 - -0.37 Credit Default Swaps / Credit Default Swap Index -0.03 - -0.03 Currencies -0.19 - -0.19 Government -0.14 - -0.14 Supplemental Performance Statistics Supplemental Risk Statistics 1 Year (Daily) Standard Deviation 1.21 Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/342-5236 or visit franklintempleton.com for the most recent month-end performance. Investment Philosophy Our investment philosophy is to work to grow capital by seeking to produce attractive risk-adjusted returns with lower correlation to traditional asset classes and reduced volatility. We believe that comprehensive risk management, rigorous manager research and active strategy allocation are key to a successful single-strategy, multi-manager alternatives fund. Investment Process K2 Advisors (K2) combines manager research with strategy allocation analysis to construct a dynamic single-strategy, multi-manager fund investing across alternative fixed income and credit strategies that go beyond long-only mandates, targeting opportunities in an attempt to generate returns while preserving capital in market downturns. Dynamic and diversified alternative strategy allocation analysis is performed from a top-down perspective. Through this analysis, K2 seeks to identify factors influencing returns and risks across market cycles. Utilizing holdings-based transparency, K2 seeks to identify alpha-generating managers through manager research and monitoring. On an ongoing basis, K2 then monitors each manager s market exposures as well as operational and headline risks. 11. Source: HedgeMark. Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% 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. franklintempleton.com 4

K2 s portfolio construction process aims to manage overall portfolio exposures and risks through extensive modeling and scenario analysis. An Alternative Solution to Better Diversify Fixed Income Portfolios Benefits Structural advantages compared to traditional hedge funds with daily transparency to K2 fund managers, enhanced liquidity and improved control over fund assets Institutional-quality alternative managers with a lower minimum investment than similar institutional vehicles Franklin K2 Long Short Credit Fund Diversification across multiple fixed income and credit hedge strategies and managers Disciplined capabilities that include manager research and monitoring, strategy allocation analysis, and portfolio construction and management Risk management processes and systems tailored to allow the ability to identify potential risk exposures as portfolio managers construct portfolios Active management by experienced hedge strategy experts Investment Team Portfolio Manager Years with Firm Years Experience Charmaine Chin 10 15 Jeff Schmidt 4 36 Robert Christian 7 28 David C. Saunders 23 35 Glossary Gross Exposure: Gross exposure is the sum of the absolute value of all exposures, directly or through derivatives, as a percentage of total assets. The sum of the percentage of long positions and short (in absolute terms) positions. Long Exposure: Sum of the long exposures, directly or through derivatives, as a percentage of total assets. Net Exposure: Net exposure is the sum of the total value of all exposures, directly or through derivatives, as a percentage of total assets. The percentage value of the long positions less the percentage value of the short positions. Short Exposure: Sum of the short exposures, directly or through derivatives, as a percentage of total assets. Standard Deviation: Standard deviation is a statistical measurement of the dispersion of historical returns. A higher standard deviation means greater volatility. Calculated by annualizing the standard deviation of the fund s daily returns over the 1-year period ended as of the date of the calculation. franklintempleton.com 5

What Are The Risks? All investments involve risks, including possible loss of principal. The market values of securities owned by the Fund will go up or down, sometimes rapidly or unpredictably. The Fund s performance depends on the manager s skill in selecting, overseeing, and allocating Fund assets to the subadvisors. The Fund is actively managed and could experience losses if the manager s and sub-advisors judgment about particular Fund portfolio investments prove to be incorrect. Some sub-advisors may have little or no experience managing the assets of a registered investment company. Bond prices generally move in the opposite direction of interest rates. Changes in the financial strength of a bond issuer or in a bond s credit rating may affect its value. Lower-rated or high yield debt securities ( junk bonds ) involve greater credit risk, including the possibility of default or bankruptcy. Liquidity risk exists when securities become more difficult to sell, or are unable to be sold, at the price at which they ve been valued. Investments in derivatives involve costs and create economic leverage, which may result in significant volatility and cause the Fund to participate in losses (as well as gains) that significantly exceed the Fund s initial investment. The Fund may make short sales of securities, which involves the risk that losses may exceed the original amount invested. Please see the prospectus and summary prospectus for information on these as well as other risk considerations, including the risks of foreign investments. Important Legal Information Investors should carefully consider a fund s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. The index data referenced herein is the property of Merrill Lynch, Pierce, Fenner & Smith Incorporated ( BofAML ) and/or its licensors and has been licensed for use by Franklin Templeton. BofAML and its licensors accept no liability in connection with this use. See www.franklintempletondatasources.com for a full copy of the Disclaimer. Source: Hedge Fund Research, Inc. - www.hedgefundresearch.com. The HFR indices are being used under license from Hedge Fund Research, Inc., which does not endorse or approve of any of the contents of this report. Unlike most asset class indexes, HFR Index returns reflect fees and expenses. Important data provider notices and terms available at: www.franklintempletondatasources.com 1. The investment manager has contractually agreed to waive or assume certain expenses so that the total annual fund operating expenses (excluding 12b-1 fees; acquired fund fees and expenses; expenses related to securities sold short; and certain non-routine expenses) for each class of the fund do not exceed (and could be less than) 1.95% until September 30, 2017. This rate differs from the Total Annual Operating Expense with Waiver (the fund s Net Expense Ratio ), which reflects the full costs associated with an investment in the fund minus the contractual waivers/reductions, and is the figure that is used to calculate a fund s total returns. Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 (800) DIAL BEN/342-5236 franklintempleton.com 2018 Franklin Templeton Investments. All rights reserved. 998 PP 03/18