Franklin Templeton Investment Funds Franklin Templeton Global Allocation Fund Fund Details Inception Date 29 July 2011 Investment Style Benchmark(s) Asset Allocation 50% MSCI All Country World Index 35% Citigroup World Government Bond Index 10% Payden & Rygel 90-Day T-Bill Index 5% Dow Jones UBS Commodities Total Return Index FUND OBJECTIVE Franklin Templeton Global Allocation Fund (the Fund ) seeks to maximise total returns consisting of capital appreciation and income. The Fund seeks to achieve its investment objective by investing in a diversified portfolio of equity and fixed income securities supplemented by a tactical investment strategy which may include structured products, cash and financial derivative instruments designed to allow the Fund to adjust its exposure to asset classes, geographic regions, currencies and market sectors. The Fund primarily invests in equity securities of companies of any market capitalisation located anywhere in the world, including emerging markets as well as debt securities issued by government, government-related and/or corporate entities worldwide as well as debt obligations issued by supranational entities organised or supported by several national governments. The Fund is structured as a multi-manager fund. The Investment Manager is responsible for monitoring the Fund s overall investment performance and for re-balancing the Fund s portfolio allocation. The Investment Manager makes an allocation of assets to investment strategies followed independently by investment co-managers of Franklin Templeton Investments selected by the Investment Manager. WHY CONSIDER THIS FUND Fundamentally-Driven Approach to Global Tactical Asset Allocation The global tactical asset allocation program is a systematic, fundamentally driven process that includes bottom-up valuation analysis, macroeconomic and short-term market indicators. The goal of the tactical asset allocation program is to add value by creating an additional return source that is not correlated to the individual asset classes or strategies while at the same time providing a mechanism to hedge the portfolio during a market downturn. A Core Allocation Providing a Globally Diversified Portfolio Base The Fund is constructed around a core allocation structured with complementary investment strategies from across Franklin Templeton Investments. These strategies are managed by an experienced group of some of the most-respected portfolio managers at across Franklin, Templeton and Mutual Series and represent some of the best investment ideas of the firm. The core allocation provides broad diversification across regions, markets, sectors and economic exposures, driven by the type of dedicated, bottom-up investing which Franklin Templeton Investments is known for. Viewing Asset Allocation Through a Global Lens The Fund s global mandate expands the opportunity set to provide broad diversification opportunities that can help potentially lower overall portfolio volatility. This starts with the core allocation level, with allocation spread over markets, sectors and styles, and is enhanced with the Fund s tactical strategy which shifts the portfolio s overall allocation based on current views for the global markets. All MSCI data is provided as is. The portfolio described herein is not sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates or any MSCI data provider have any liability of any kind in connection with the MSCI data or the portfolio described herein. Copying or redistributing the MSCI data is strictly prohibited. For Broker/Dealer and Institutional Investor Use Only. Not for Public Distribution. 1
INVESTMENT PHILOSOPHY & PROCESS Overall Fund management responsibility is handled by Brent Smith and Samer Habl, Franklin Templeton Multi-Asset Strategies (FTMAS). FTMAS is a global multi-asset management platform that seeks to deliver superior risk-adjusted returns by applying a top-down, active asset allocation approach to multi-manager solutions. While new in name, FTMAS has more than 25 years of experience in fund of funds portfolio management and multi-manager selection products dating back to its roots in Fiduciary Trust, the trust and investment management platform for high net worth individuals under Franklin Templeton Investments. 1 The Fund investments are structured around two components: a core strategy, managed by portfolio managers from various investment platforms within Franklin Templeton Investments, and a tactical strategy, which is driven by FTMAS belief that overall portfolio risk/return characteristics can be improved by a systematic approach to tactical asset allocation that seeks to take advantage of mis-valuations across global equity and bond markets. The Fund s investment process centers on creating a solid, globally-diversified core portfolio base, while simultaneously seeking to enhance the Fund s return potential and lower overall portfolio risk through the use of active tactical asset allocation. As the tactical allocation portion of the Fund is designed to adjust the portfolio s exposures independently of the investment process of the strategies comprising the core portfolio, overall portfolio construction seeks to create multiple sources of return for the Fund. Through general asset class exposure, the Fund will provide a certain level of market exposure, or beta, allowing the Fund to participate in movement within those asset classes. In addition, each investment strategy in the core portfolio will implement strategies built around their core competencies. The tactical sleeve will seek to enhance the risk and return characteristics of the overall Fund by actively managing the Fund s equity, fixed income, country/market and currency exposures based on timely analysis of current market and economic environments. Core Portfolio Allocation The core portfolio of the Fund is structured as a multi-manager fund, diversified across seven different investment sleeves each managed by investment managers from across Franklin Templeton Investments. Additionally, the Fund utilizes a broad-based exchange-traded note for exposure to the commodities asset class. 1. Franklin Templeton Multi-Asset Strategies (FTMAS) is a global investment management group dedicated to multi-strategy solutions and is comprised of individuals from various registered entities within FTI. Certain individuals based in Canada that advise FTMAS mandates are part of Fiduciary Trust Company of Canada, a wholly owned subsidiary of FTI, that originated in 1982. FTMAS was formed in 2007 to combine the research and oversight of all multi-strategy investment solutions offered by FTI. FTMAS invests in various Franklin Templeton investment platforms; AUM for FTMAS is reported under each utilized investment platform, as well as for FTMAS. For Broker/Dealer and Institutional Investor Use Only. Not for Public Distribution. 2
The investment managers and strategies the core allocation utilizes were selected for their complementary characteristics to help create a truly diversified foundation for the portfolio. The management teams in the core allocation each implement strong fundamentally-driven processes focused on individual security selection. The core allocation was designed to leverage the core strengths of each of the selected investment platform teams while maximizing global coverage. A list of the investment management platforms and corresponding strategies they manage includes: Mutual Series Equity (Deep Value Equities) Portfolio built on a foundation of undervalued securities. Franklin U.S. Growth Team (All-Cap U.S. Growth Equities) A multi-cap approach identifying companies with potential for long-term sustainable growth. Franklin Global Growth Team (Concentrated Non-US Growth) A focused strategy seeking high-quality, sustainable growth outside of the U.S. Templeton Global Equity Group (Non-U.S. Value Equity) Rigorous approach driven by in-depth fundamental analysis and time-tested for over 70 years. Templeton Emerging Market Team (Emerging and Frontier Markets) An early pioneer in emerging and frontier markets investing. Franklin Templeton Global Fixed Income Team (Opportunistic Global Fixed Income) A high alpha seeking strategy that invests globally, including emerging markets. Franklin Templeton Fixed Income Group (Global Low Duration Bond) A low volatility, multi-sector fixed income anchor for the portfolio Broad Basket ETN (Commodities) Passive exposure to a broad basket of commodities. Tactical Asset Allocation Strategy FTMAS will manage the Fund s overall asset allocation exposure via the tactical strategy. Under normal market conditions, the Fund s baseline allocation between broad asset classes is expected to be: 50% Global Equity (U.S. / International / Emerging) 35% Global Fixed Income (U.S. /International / Emerging) 5% Commodity-linked Instruments 10% Cash For Broker/Dealer and Institutional Investor Use Only. Not for Public Distribution. 3
The tactical asset allocation process will allow the portfolio to actively make adjustments to the portfolio based on insights provided by the strategy models. As noted in the illustration to the left, these models utilize fundamental, macroeconomic and short-term technical factors to identify opportunities. Ultimately, information gleaned from the models helps form team views on relative valuation/attractiveness within the model s opportunity set to help form the following decision factors: Equities-to-Bonds (Asset Allocation) Equity Country/Market Selection Bond Country/Market Selection Currency Selection The opportunity set for the tactical strategy is representative of the overall Fund, being both global and multi-asset in nature. Model inputs are represented by a series of valuation signals that cover fundamental, macro-economic and short-term indicators. These signals vary by asset class, with distinct factors being utilized for equities, bonds and currencies. A sample representation of these factors is listed below. Representative Valuation Signals 2 Equities Bonds Currencies Earnings Book Value GDP Growth Monetary Policy Equity Volatility Leading Economic Indicators Bond Yields Short-Term Rates Inflation Monetary Policy Bond Volatility Credit Spreads Interest Rate Differentials Yield Curves Purchasing Power Parity Implied Momentum FX Volatility 2. The sample list provided is not representative of the complete valuation signal set used by the fund s tactical asset allocation models. There is no guarantee that these signals will be used by the model in the future. For Broker/Dealer and Institutional Investor Use Only. Not for Public Distribution. 4
PORTFOLIO CONSTRUCTION Under normal market conditions, the Fund seeks to achieve its investment goal by investing approximately 90% of its net assets in a diversified core portfolio of equity and fixed income investments, as well as commodity-linked instruments, and 10% of its net assets in cash utilized to support a tactical investment strategy designed to allow the Fund to adjust its exposure to certain asset classes, regions, currencies and sectors independent of the investment processes of the investment strategies that comprise the core portfolio. The Fund is structured as a multi-manager fund, with the FTMAS team responsible for portfolio design and rebalancing, management of the tactical strategy and total portfolio oversight. The baseline allocation, as described above, also may change from time to time, at the discretion of the Investment Manager. The overall portfolio construction process for the Fund will seek to optimize overall portfolio exposures via dynamic risk budgeting. This includes the use of proprietary risk and correlation models as well as relative valuation outputs generated from investment signal analysis to establish forward-looking, directional views for asset class returns and volatilities. This process will provide FTMAS portfolio managers an optimized, recommended tactical allocation. Implementation of the tactical strategy then takes place via futures, forwards, options and other derivatives instruments, which in turn are supported by portfolio cash. The tactical allocation portion will use primarily stock index futures, government bond futures, currency and currency index futures and currency forwards. These instruments will allow the FTMAS portfolio managers to gain net long or net short exposure to representative asset classes in an efficient manner through highly liquid investments. Use of these derivative instruments will be used to obtain exposure to various market sectors or securities, for hedging purposes, or to otherwise enhance Fund returns. Once portfolio allocations have been implemented, monitoring of the portfolio will include the FTMAS teams Global Asset Allocation Committee as well as the oversight provided by the firm s Performance Analysis and Investment Risk (PAIR) group. For Broker/Dealer and Institutional Investor Use Only. Not for Public Distribution. 5
RISK MANAGEMENT The Fund leverages the depth and experience of Franklin Templeton s Performance Analysis and Investment Risk (PAIR) Group, which works separately from the portfolio management function, monitoring investment risk for all portfolios managed by the firm. PAIR has the express mandate to integrate investment risk management into the portfolio construction process and continues to improve on detailed decomposition of various risk factors that the portfolios may be exposed to. Through the use of various risk systems, the PAIR Group is able to indicate the active risk or tracking error of the account versus the benchmark as well as to show what the sources of active risk are (i.e., country, sector or style differences) and which specific issues are the largest contributors to active risk. The Fund has specific investment guidelines and requirements that are set forth by the board of directors of Franklin Templeton Investment Funds (FTIF) and reviewed on a quarterly basis to ensure that the risk management process is adhered to: Asset Classes: The Fund primarily invests in equity and equity-related securities of companies of any market capitalisation located anywhere in the world, including Emerging Markets as well as debt and debt-related securities issued by government, government-related and/or corporate entities worldwide as well as debt obligations issued by supranational entities organised or supported by several national governments. The Fund may seek exposure to commodities through the use of cash-settled structured products and exchangetraded notes. The Fund may invest in securities of companies involved in mergers, consolidations, liquidations and reorganisations or as to which there exist tender or exchange offers, and may participate in such transactions. It may also invest in low-rated, non- investment grade and defaulted debt securities of various issuers, in fixed or floating rate securities, either directly or through regulated investment funds (subject to the limits stated in the prospectus). Country/regional and Sector Limits: There are no limits. Min/Max Security Positions: Individual security positions typically do not exceed 5% of the Fund s total net assets. Cash Policy: Portfolio managers intend to remain close to fully invested at all times. Reported cash and cash equivalent numbers may exceed 10% in extraordinary periods. Currency Policy: There are no constant hedge ratios for the Fund. However, currency is an important consideration at the security level for both equity and fixed income. In the fixed income portion, futures and other derivatives may be used for hedging purposes, as well as for expressing positive and negative currency views. Derivatives: Financial derivative instruments may be dealt either in regulated markets or over- the-counter, and may include, inter alia, swaps (such as credit default swaps or total return swaps), forwards and cross forwards, futures contracts (including those on government securities), as well as options. Use of financial derivatives may result in negative exposures in a specific yield curve/duration, currency, or credit. Risk management is integrated into every aspect of the Fund s investment process. In addition to structural controls such as fund specific constraint and position limits, risk management taking place at three levels: In addition to Fund specific constraint and position limits, For Broker/Dealer and Institutional Investor Use Only. Not for Public Distribution. 6
During optimization in the portfolio construction stage, the portfolio utilizes a four dimensional risk model incorporating inputs based on the volatility of returns, stability of correlations, concentration of bets and extreme event probabilities. During the implementation stage, the PAIR group provides oversight, including monitoring of overall portfolio risks and factor exposure, as well as providing regular performance attribution to the portfolio management team to help identify where intended and unintended exposures exist. During the monitoring stage, the Fund s experienced portfolio management team reviews current portfolio design and positioning. An internal, crossdepartmental committee provides additional oversight and review of overall portfolio positioning. PORTFOLIO MANAGEMENT TEAM Overall portfolio management for the Fund is provided by the Fund s lead comanagers, Brent Smith and Samer Habl from the Franklin Templeton Multi-Asset Strategies (FTMAS) group. FTMAS consists of over 20 investment professionals located in offices worldwide, providing distinct multi-asset management expertise. Brent Smith, CFA Sr. Vice President Chief Investment Officer Portfolio Manager Franklin Templeton Multi-Asset Strategies Brent Smith, based in Fort Lauderdale, FL, U.S., is Senior Vice President and Chief Investment Officer of Franklin Templeton Multi-Asset Strategies. In his roles, he is responsible for overseeing the investment functions of the locally managed and distributed fund of funds products for the organization globally. Mr. Smith is also a member of the Global Asset Allocation Strategy Committee. In addition to the Fund, he has co-portfolio management responsibilities for the firm's flagship Canadian domiciled fund of funds portfolios and various offshore portfolios. Samer Habl, based in San Mateo, CA, U.S., is the director of portfolio strategy for Franklin Templeton Multi-Asset Strategies. In this role, he is responsible for developing global tactical asset allocation investment strategies. Prior to joining Franklin Templeton Investments in 2010, Mr. Habl worked at Mellon Capital Management for about 10 years where he was most recently the managing director of Global Tactical Asset Allocation Research supporting domestic TAA, currency overlay and GTAA strategies. Samer Habl Director of Portfolio Strategy Portfolio Manager Franklin Templeton Multi-Asset Strategies CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. For Broker/Dealer and Institutional Investor Use Only. Not for Public Distribution. 7
This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of the Luxembourgdomiciled SICAV Franklin Templeton Investment Funds (the Fund ). Nothing in this document should be construed as investment advice. Opinions expressed are the author s at publication date and they are subject to change without prior notice. Subscriptions to shares of the Fund can only be made on the basis of the current prospectus of the Fund and, where available, the relevant Key Investor Information Document, accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter. 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. Past performance is not an indicator or a guarantee of future performance. 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. An investment in the Fund entails risks which are described in the Fund s prospectus and, where available, the relevant Key Investor Information Document. No shares of the Fund may be directly or indirectly offered or sold to nationals or 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. Any research and analysis contained in this document has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund s holding at any one time. Please consult your financial advisor before deciding to invest. A copy of the latest prospectus, and if available for this product the Key Investor Information Document, the annual report and semi-annual report, if published thereafter can be found, on our website www.ftidocuments.com or can be obtained, free of charge, from Franklin Templeton International Services S.A. - Professional of the Financial Sector under the supervision of the Commission de Surveillance du Secteur Financier - 8A, rue Albert Borschette, L-1246 Luxembourg - Tel: +352-46 66 67-1 - Fax: +352-46 66 76. Issued by Franklin Templeton International Services S.A. 2012 Franklin Templeton Investments. All rights reserved. Dec-12 For Broker/Dealer and Institutional Investor Use Only. Not for Public Distribution. 8