Franklin Emerging Market Debt Opportunities (USD) Composite Unconstrained Fixed Income Product Profile Product Details Composite Assets $2,231,815,951.87 Inception Date 31/08/1996 Base Currency USD Investment Style Unconstrained Overview 1 Emerging market debt strategy that takes an absolute return approach, whereby we will only invest in countries or securities we find attractive, irrespective of benchmark weights Diversified portfolio of hard and local currency emerging market issuers Return Target: 8 10% per annum over the course of a full market cycle Performance Data Average Annual Total Returns (USD %) 2 Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs (31/08/1996) Franklin 1.33-0.60 1.61 8.65 5.00 8.09 13.02 10.86 Emerging Market Debt Opportunities (USD) Composite - GROSS Franklin 1.15-1.12 0.91 7.91 4.29 7.28 12.05 9.89 Emerging Market Debt Opportunities (USD) Composite - NET JP Morgan EMBI 2.30-3.04-1.92 6.04 5.38 7.55 9.81 9.00 Global Diversified (USD Based) JP Morgan GBI- -1.91-7.44-6.72 4.59-0.44 2.96 - - EM Broad Diversified ICE BofAML 1.21-1.24-0.76 5.36 4.32 7.16 - - Emerging Market Corporate Plus (USD Hedged) 1. Targets represent the goal the strategy seeks against the JP Morgan EMBI Global Diversified (USD Based) and do not take into account management fees or other expenses an investor would incur in the management of its account, which would reduce any returns. There is no assurance that employment of the strategy will result in the intended targets being achieved. 2. Periods of more than one year are annualised. Past performance is not an indicator or a guarantee of future performance.
20% 10% 0% -10% 13.02 12.05 8.65 10.86 7.91 8.09 9.89 6.04 5.00 4.29 5.38 7.28 7.55 9.81 9.00 1.33 1.15 2.30 4.59 5.36 7.16 4.32 1.21 1.61 0.91 2.96-1.91-0.60-1.12-3.04-1.24-1.92-0.76-0.44-7.44-6.72 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception Franklin Emerging Market Debt Opportunities (USD) Composite - GROSS Franklin Emerging Market Debt Opportunities (USD) Composite - NET JP Morgan EMBI Global Diversified (USD Based) JP Morgan GBI-EM Broad Diversified ICE BofAML Emerging Market Corporate Plus (USD Hedged) Calendar Year Returns (USD %) Franklin Emerging Market Debt Opportunities (USD) Composite - GROSS Franklin Emerging Market Debt Opportunities (USD) Composite - NET JP Morgan EMBI Global Diversified (USD Based) 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 12.55 12.51-0.81-0.06 2.08 18.11 2.57 16.33 60.93-28.35 11.80 11.75-1.47-0.72 1.41 17.26 1.67 15.27 59.44-29.07 10.26 10.15 1.18 7.43-5.25 17.44 7.35 12.24 29.82-12.03 Portfolio Manager Insight Market Review Emerging-market (EM) hard-currency government bonds returned 2.30% in the third quarter, as per the JP Morgan Emerging Markets Bond Global Diversified. Ten-year US Treasury yields rose 20 basis points to 3.06%. The spread-to-worst of US-dollar EM government debt narrowed by more than the rise in US benchmark yields during the quarter. EM hard-currency corporate bonds returned 1.21%, as per the ICE BofAML Emerging Markets Corporate Plus, hedged into US dollars. EM corporate spreads narrowed by less than government spreads during the quarter. EM local-currency government bonds (unhedged, in US-dollar terms) posted a loss of 1.91%, as per the JP Morgan Government Bond Emerging Markets Broad Diversified. Many EM currencies registered steep falls during the quarter, but others, such as the Mexican peso, notably rose. Local-currency EM bond yields rose marginally during the quarter. Performance Review 3 US-dollar notes issued by Ukraine s City of Kyiv were the main contributor to the strategy s performance. These defaulted notes were revalued upwards during the quarter, following the settlement, during the third quarter, of a December 2017 agreement between Franklin Templeton and City of Kyiv. Participation in a US-dollar loan to Chad s state oil company also boosted returns. The value of this loan rose during the quarter, as rising oil prices made it more likely that 5% of the loan would be repaid ahead of schedule. Exposure to the Turkish lira was the main detractor from the strategy s performance. The value of the lira declined substantially during the quarter as a result of Turkey s current account deficit, interventions by Turkish President Recep Tayyip Erdoğan, and a diplomatic spat between Turkey and the United States that included sanctions imposed by both sides. Outlook & Strategy EM asset prices continued to be volatile in the third quarter. Idiosyncratic stories about Turkey and Argentina dominated news flow and sentiment. The macroeconomic imbalances and political challenges in both countries appear to have been outliers, but a broad range of EM bonds from other nations came under pressure too. International trends continue to be an important influence. Liquidity is tightening, as central banks in developed markets are gradually reducing their stimulus. An escalation of trade tensions, especially between the United States and China, might lead to further downgrades of EM growth estimates. Oil prices have been on an upward trajectory for most of 2018, which has been supportive for most, but not all, EM countries. Following recent corrections in EM bond valuations, we continue to see opportunities within the EM bond universe, but we remain vigilant about idiosyncratic risks in specific countries. 2
Portfolio Characteristics of a Representative Account 3,4 JP Morgan EMBI Global Diversified (USD Portfolio Based) Number of Securities Including Cash 94 670 Yield to Maturity 9.56% 6.19% Yield to Worst 9.55% 6.18% Average Duration 3.35 Yrs 6.67 Yrs Average Credit Quality 5 B+ BB+ Average Weighted Maturity 5.77 Yrs 11.00 Yrs Duration to Worst 3.95 Yrs 6.67 Yrs Portfolio Diversification of a Representative Account 3 Country Allocation 6 15 10 5 0 Risk Category Allocation 6 One Colombia Mexico South Africa Russia Azerbaijan Peru Trinidad and Tobago China Ukraine Iraq 18.76 Argentina Nigeria Turkey Georgia Uruguay Tunisia El Salvador Brazil Kazakhstan Indonesia Republic of Angola Chad Ghana GRENADA Ethiopia Republic of Armenia One Two Three Residual Supranational Funds Geographic Allocation 6 MIDDLE EAST / AFRICA Mozambique Gabon Kenya Venezuela Bosnia and Herzegovina Cameroon Egypt Suriname Dominican Republic Uganda Jordan Jamaica Republic of Belarus Cash & Cash Equivalents Supranational 38.32 Mixed Two 41.43 LATIN AMERICA 29.10 Three 30.82 EASTERN EUROPE 14.46 Residual 5.99 FAR EAST / ASIA 9.14 RESIDUAL 5.99 Supranational 2.31 FUNDS 0.68 Funds 0.68 SUPRANATIONAL 2.31 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0% 10% 20% 30% 40% 50% 5. 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. 3
Currency Allocation 6 US Dollar Japanese Yen Colombian Peso Mexican Peso Uruguayan Peso South African Rand Ghanaian Cedi-New Turkish Lira Kenyan Shilling Indonesian Rupiah Georgian Lari Euro Egyptian Pound Peruvian Nuevo Sol Kazakhstn Tenge Russian Ruble Dominican Peso Ugandan Shilling Azerbaijani Manat 7.56 4.32 3.49 3.03 2.75 1.92 1.74 1.44 1.39 1.22 1.21 1.04 0.98 0.95 0.93 0.90 0.79 0.59 63.73 0% 20% 40% 60% 80% Portfolio Allocation 6 Sovereign Corporates Quasi-Sovereign Residual Funds 0.35 5.99 16.31 18.91 58.43 0% 10% 20% 30% 40% 50% 60% 70% Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) Franklin Emerging Market Debt Opportunities (USD) 5.98 6.20 11.22 11.60 Composite JP Morgan EMBI Global Diversified (USD Based) 5.48 5.34 8.65 10.56 Tracking Error (%) 3.18 3.56 6.51 5.87 Information Ratio 9 0.82-0.11 0.08 0.32 Sharpe Ratio Franklin Emerging Market Debt Opportunities (USD) 1.31 0.72 0.69 0.75 Composite JP Morgan EMBI Global Diversified (USD Based) 0.95 0.91 0.84 0.65 Investment Philosophy Our philosophy is that a diversified portfolio consisting of issues denominated in hard and local currencies has the potential to generate attractive returns at lower levels of absolute risk than the standard emerging market debt benchmarks, which tend to be concentrated in a few issuers. We believe that a bottom up, research-driven, qualitative investment process, combined with a risk-controlled approach, has the potential to achieve our objective of outperforming standard benchmarks at low levels of absolute risk. Investment Process Franklin s Emerging Market Debt Opportunities investment process can be summarised in three integral steps country allocation, currency allocation and issuer selection. 7. Risk statistics are calculated using gross of fees composite performance. 8. Beta, Information Ratio and Tracking Error information are measured against the JP Morgan EMBI Global Diversified (USD Based). 4
Ongoing Monitoring and Risk Management 1. Country Allocation 2. Currency Allocation 3. Issuer Selection Countries are ranked into three risk categories (high/medium/low) Yield vs. Fundamentals Improving Credit Potential to Help the Strategy Meet its Return Target Hard vs. Local Currency Assessment Yield vs. Risk Volatility Liquidity Relative Pricing Sovereign Debt Emerging Market Credit (Sovereign, Quasi-Sovereign, Corporate) Local Asset Management Corporate Credit Global Macro Emerging Market Equity Investment Team Portfolio Manager Years with Firm Years Experience William Ledward 21 33 Nicholas Hardingham, CFA 15 18 Fatma Charlwood 14 15 Philip Spires 12 23 Stephanie Marjan Ouwendijk, CFA 3 11 Additional Resources Corporates - High Yield Corporates - Investment Grade Fixed Income Policy Committee Global Sovereign/EMD Local Asset Management Templeton Emerging Markets Equity Product Managers Years with Firm Years Experience Alberto Landi 10 10 Stuart Lingard 7 20 5
Important Legal Information Franklin claims compliance with the Global Investment Performance Standards (GIPS ). Franklin (the firm ) encompasses the equity, fixed income and balanced accounts managed by Franklin Advisers, Inc., and related Franklin affiliates, including, effective 1 January 2007, the equity accounts managed by the institutional investment teams of Franklin Templeton Institutional, LLC under the former firm name of Fiduciary Global Advisors. The combined equity assets of Franklin and Fiduciary Global Advisors form the Franklin Equity Group (formerly Franklin Global Advisers prior to 30 June 2010) unit of Franklin. Effective 1 January 2006, the fixed income assets managed from that date forward by Franklin Templeton Institutional, LLC ( FTI ) or its related affiliates (managed previously by Fiduciary Trust Company International - Institutional Division or FTCI s Institutional Division ) that went through the institutional portfolio review process were combined with the fixed income assets of Franklin to form the Franklin Templeton Fixed Income unit of Franklin. The primary reason for these changes to the firm definition was to consolidate equity and fixed income asset management for Franklin (as previously defined), Fiduciary Global Advisors (institutional equities) and FTCI s Institutional Division (institutional fixed income) under one firm, Franklin. The firm definition for Franklin does not include multistrategy asset allocation portfolios managed by Franklin Templeton Multi-Asset Solutions (FTMAS), which was previously known as Franklin Templeton Solutions as well as Franklin Templeton Multi-Asset Strategies and the wrap-fee and non-wrap-fee accounts managed by Franklin Separately Managed Accounts (formerly Franklin Portfolio Advisors) or Franklin Europe which integrated into the Templeton firm definition effective 1 December 2017. Franklin Emerging Market Debt Opportunities (USD) Composite consists of all portfolios managed on a fully discretionary basis with an investment objective that seeks to achieve an above total return by investing in emerging market sovereign, quasi-sovereign and corporate debt instruments in both local and G7 currencies. In addition, the strategy may invest in below investment grade bonds (rated below BBB-). The strategy is not constrained by benchmark weightings and may take tactical exposure to G7 as well as to emerging market currencies, but with the objective of managing to the base currency needs of a U.S. dollar (USD) investor. The strategy regularly uses currency forwards, options, interest rate futures, credit-linked notes and, on a somewhat less frequent basis, other derivatives such as swaps (including credit default swaps and total return swaps) for hedging purposes or for investment to control risk or assume tactical exposure to various foreign currencies or asset classes consistent with the investment objective. Occasionally, the strategy may engage in writing puts and calls on securities. Total returns are presented in U.S. dollars both gross and net of investment advisory fees, are inclusive of commissions and transaction costs, and assume reinvestment of any dividends, interest income, capital gains, or other earnings. Periods greater than one year are shown as average annual total returns. Performance data is shown rounded to the nearest hundredth. The returns presented for periods prior to 1 January 2000 are not in compliance with the GIPS standards. Past performance is not an indicator or a guarantee of future performance. When performance for either the portfolio or its benchmark has been converted, different foreign exchange closing rates may be used between the portfolio and its benchmark. The JP Morgan EMBI Global Diversified is a market value weighted fixed income index comprised of U.S. dollar denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities. The secondary benchmark, JP Morgan GBI-EM Broad Diversified, includes securities denominated in local currencies. The JP Morgan GBI-EM Broad Diversified USD-Unhedged is a U.S. dollar denominated market value weighted fixed income index comprised of local currency government bonds of emerging market countries. As of December 31, 2012 the third benchmark was changed to The BofA Merrill Lynch Emerging Markets Corporate Plus (100% Hedged into USD). This benchmark is a capitalisation weighted fixed income index hedged to the U.S. dollar and comprised of U.S. dollar and Euro denominated emerging markets nonsovereign debt publicly issued within the major domestic and European markets. Because three countries dominate most emerging markets indices, the firm does not base its asset allocation upon any emerging market index. Rather, the firm s asset allocation is constrained by three sets of investment guidelines consisting of currency denomination, regions, and country selection. Although the firm s strategy in emerging market debt is not managed to a benchmark, we are including three indices for comparative purposes, to represent the investment environment existing during the time periods shown. es are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. To receive a complete list and description of Franklin composites (including any single account mutual fund composite) and/or a presentation that adheres to the GIPS standards for any composite, contact your Franklin Templeton institutional representative listed below. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. The index data referenced herein is the property of Intercontinental Exchange ( ICE ) and/or its licensors and has been licensed for use by Franklin Templeton. ICE and its licensors accept no liability in connection with this use. See www.franklintempletondatasources.com for a full copy of the Disclaimer. Important data provider notices and terms available at www.franklintempletondatasources.com. 3. Portfolio information is based on a representative account taken from the Franklin Emerging Market Debt Opportunities (USD) Composite. The information is historical, may not reflect current or future characteristics and may vary significantly among individual separate accounts depending on a variety of factors such as portfolio size, specific investment guidelines and inception dates of the individual accounts. 4. Yield to Maturity, Yield to Worst, Average Duration and Average Weighted Maturity reflect certain derivatives held in Portfolio (or their underlying reference assets). 6. 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. 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). For Institutional Professional Investors only not for distribution to retail clients. This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended 2018 Franklin Templeton Investments. All rights reserved.
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