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Semiannual Report and Shareholder Letter March 31, 2016 Franklin Custodian Funds Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities
Semiannual Report and Shareholder Letter March 31, 2016 Franklin Custodian Funds Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund Sign up for electronic delivery at Franklin Templeton Investments Gain From Our Perspective At Franklin Templeton Investments, we re dedicated to one goal: delivering exceptional asset management for our clients. By bringing together multiple, world-class investment teams in a single firm, we re able to offer specialized expertise across styles and asset classes, all supported by the strength and resources of one of the world s largest asset managers. This has helped us to become a trusted partner to individual and institutional investors across the globe. Dear Shareholder: During the six months ended March 31, 2016, the U.S. economy grew modestly. After much market anticipation, the U.S. Federal Reserve began normalizing its target interest rate in December Within this environment, U.S. stocks, as measured by the Standard & Poor s 500 Index, rallied with an 8.49% total return for the six-month period. 1 Investment-grade bonds, as measured by the Barclays U.S. Aggregate Bond Index, posted a gain of 2.44%. 1 We remained encouraged as the U.S. showed signs of continued economic growth and low inflation. In all economic environments, we are committed to our long-term perspective and disciplined investment approach as we conduct diligent, fundamental analysis of securities with a continual emphasis on investment risk management. Franklin Custodian Funds semiannual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your future investment needs. Sincerely, Rupert H. Johnson, Jr. Chairman Franklin Custodian Funds This letter reflects our analysis and opinions as of March 31, The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable. We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today s markets and encourage investors to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well-diversified portfolio and a patient, long-term outlook will be well positioned for the years ahead. 1. Source: Morningstar. See for additional data provider information. Not FDIC Insured May Lose Value No Bank Guarantee Not part of the semiannual report 1 Contents Semiannual Report Economic and Market Overview... 3 Franklin DynaTech Fund... 4 Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund Financial Highlights and Statements of Investments Financial Statements Notes to Financial Statements Shareholder Information Visit for fund updates, to access your account, or to find helpful financial planning tools. 2 Semiannual Report Semiannual Report Economic and Market Overview The U.S. economy grew modestly during the period under review amid solid consumer spending. In the third and fourth quarters of 2015, exports slowed and state and local governments reduced their spending. Manufacturing activities mostly contracted, except for an expansion toward period-end, while the services sector expanded throughout the period. Growth in services contributed to new jobs and helped the unemployment rate to be largely stable at 5.0% through the review period. 1 Retail sales remained mixed as they grew early in the review period due to modest automobile and auto component sales, but contracted toward period-end amid falling gasoline prices and auto sales. Inflation, as measured by the Consumer Price Index, remained subdued and contracted sharply toward period-end led by lower energy prices. In December 2015, the U.S. Federal Reserve (Fed) raised its target range for the federal funds rate to 0.25% 0.50% and maintained this rate through period-end. At the time of the increase, policymakers cited the labor market s considerable improvement and were reasonably confident that inflation would move back to the Fed s 2% medium-term objective. The Fed kept interest rates unchanged at its March meeting and indicated that it would monitor global economic and financial developments and their implications on the labor market and track their actual and expected progression toward its employment and inflation goals. U.S. stock markets experienced sell-offs during the period under review, resulting from investor concerns about the timing of the Fed s interest rate increases, slower global economic growth, weakness in China s economy and a plunge in crude oil prices. However, investors generally remained confident as the Fed maintained an accommodative monetary policy stance despite the rate increase, the European Central Bank expanded its monetary policy measures, the People s Bank of China adopted further easing measures and the Bank of Japan adopted negative interest rates. The broad U.S. stock market, as measured by the Standard & Poor s 500 Index, generated a positive total return for the six months under review. The foregoing information reflects our analysis and opinions as of March 31, The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable. 1. Source: Bureau of Labor Statistics. Semiannual Report 3 Franklin DynaTech Fund This semiannual report for Franklin DynaTech Fund covers the period ended March 31, Your Fund s Goal and Main Investments The Fund seeks capital appreciation by investing primarily in equity securities of companies that emphasize innovation and new technologies, have superior management and that benefit from new industry conditions in the dynamically changing global economy. Performance Overview The Fund s Class A shares delivered a +2.16% cumulative total return for the six months under review. In comparison, the Russell 1000 Growth Index, which measures performance of the largest companies in the Russell 3000 Index with higher price-to-book ratios and higher forecasted growth values, generated a total return of +8.11%. 1 Also for comparison, the broad U.S. stock market as measured by the Standard & Poor s 500 Index (S&P 500 ), produced a +8.49% return, and domestic and international-based stocks as measured by the NASDAQ Composite Index had a -1.45% total return. 1 You can find the Fund s long-term performance data in the Performance Summary beginning on page 8. Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to or call (800) Investment Strategy We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and competitive structure of an industry to target leaders and emerging leaders. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks. Manager s Discussion The Fund s information technology (IT) holdings contributed notably to absolute performance during the reporting period. 2 Facebook delivered strong results in the fourth quarter of its fiscal year that exceeded analysts expectations. The social media network s advertising revenue accelerated based on its successful strategy for capitalizing on the consumer shift from personal computers to mobile devices. Facebook generated a substantial portion of its revenue from mobile advertising. The company benefited from a highly engaged user base with strong data, targeting and measurement capabilities. These features prompted advertisers to continue to shift more of their budgets toward Facebook advertising. The Fund s position in Alphabet, the parent company of Internet-related services and products provider Google, also performed well. This positive performance was based on acceleration in the core Google advertising business, better cost controls, and new policies that made the company friendlier toward its shareholders. Chinese Internet portal Tencent Holdings delivered solid results that exceeded expectations despite concerns about the Chinese economy. Results were driven by strong performance from the company s social networks and growing ecosystem, as well as its online advertising and mobile gaming efforts. The Fund s financials sector positions also substantially supported results. 3 Data center provider Equinix benefited from the rising adoption of cloud computing technology. Equinix also acquired data center and colocation center company Telecity, which we believed could provide Equinix with a dominant position in the European market. Wireless communications tower operator American Tower produced 1. Source: Morningstar. The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund s portfolio. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group. 2. The IT sector comprises communications equipment; electronic equipment, instruments and components; Internet software and services; IT services; semiconductors and semiconductor equipment; software; and technology hardware, storage and peripherals in the SOI. 3. The financials sector comprises diversified financial services and real estate investment trusts in the SOI. The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund s Statement of Investments (SOI). The SOI begins on page Semiannual Report FRANKLIN DYNATECH FUND results that outperformed analysts expectations after a period of underperformance caused by concerns about the company s exposure to a falling Brazil currency. The company also made a large investment in Viom, an Indian tower company. The acquisition further diversifies American Tower s portfolio of international holdings and could extend their capacity for growth. Shares of independent credit rating agency Moody s experienced volatility in January and February 2016 based on a weak outlook for corporate high yield debt issuance. However, near period-end, the company s management team announced an optimistic debt issuance outlook. At period-end, spreads narrowed and issuance volumes improved, which we believed could provide Moody s with a manageable operating environment. The Fund s consumer discretionary sector holdings also aided performance. 4 Electronic commerce company experienced a substantial increase in its operating income during the period. This growth was driven by the company s retail and cloud computing businesses. Travel booking website The Priceline Group experienced volatility during the period. The company was hurt by headwinds caused by strong foreign currency rates and terrorist attacks in Paris and Brussels that made investors question consumer appetite for European travel. However, in February, the company reported that bookings had reaccelerated based on low oil prices and consequently cheaper air tickets. Shares of Liberty Broadband performed well in anticipation of the announced approval of the Charter/Time Warner Cable merger. Liberty Broadband invested in both companies. In other sectors, Edwards Lifesciences stock rose due to greater-than-expected sales and profits during its September and December quarters, increased expectations for sales and profits earnings in 2016, and the release of favorable mortality and stroke risk data in studies of its trans-catheter heart valves. Shares of LED lighting manufacturer Acuity Brands performed well because of continued strength in the non-residential construction market supported growth. UnitedHealth, a diversified health care company, reported strong performance from three of its lines of business: Medicare Advantage, Optum and its Catamaran acquisition. Medical devices developer Stryker s stock appreciated due to stronger-than-expected profits reported for its September 2015 and December 2015 quarters. Edwards Lifesciences, a producer of artificial heart valves and hemodynamic monitoring, was another contributor during the period. Portfolio Breakdown Based on Total Net Assets as of 3/31/16 Internet Software & Services Software Biotechnology Internet & Catalog Retail IT Services Semiconductors & Semiconductor Equipment Health Care Equipment & Supplies Real Estate Investment Trusts (REITs) Health Care Providers & Services Pharmaceuticals Life Sciences Tools & Services Diversified Financial Services Communications Equipment Textiles, Apparel & Luxury Goods Other Short-Term Investments & Other Net Assets 3.7% 3.4% 3.1% 3.0% 2.2% 2.0% 2.0% 3.1% 14.3% 14.1% 8.6% 8.4% 7.6% 6.8% 6.7% 11.0% 4. The consumer discretionary sector comprises Internet and catalog retail; media; and textiles, apparel and luxury goods in the SOI. Semiannual Report 5 FRANKLIN DYNATECH FUND Top 10 Holdings 3/31/16 Company Sector/Industry % of Total Net Assets Alphabet Inc. 5.6% Internet Software & Services Inc. 4.7% Internet & Catalog Retail Facebook Inc. 4.3% Internet Software & Services MasterCard Inc. 3.3% IT Services Visa Inc. 2.6% IT Services Equinix Inc. 2.3% Real Estate Investment Trusts (REITs) Celgene Corp. 2.2% Biotechnology Gilead Sciences Inc. 2.1% Biotechnology Inc. 2.0% Software Palo Alto Networks Inc. 2.0% Communications Equipment In contrast, the Fund s health care holdings weighed on absolute performance. 5 Incyte, like many other smaller mid-cap biotech companies, performed poorly during the period. The company s performance can be attributed to disappointing data about the efficacy of several therapies in development, as well as dissipating speculation about mergers and acquisition activity. The Fund s position in Regeneron Pharmaceuticals also detracted from Fund performance. The biopharmaceutical company was hurt by higher-than-expected expense guidance and a biotechnology selloff in January. Regeneron also suffered after it lost an important patent decision about its high cholesterol medication Praluent. The telecommunication services sector also detracted from Fund results. 6 Wireless infrastructure operator SBA Communications was pressured during the period by a variety of factors. The company suffered from poor guidance driven by operating headwinds that we feel could abate with time. SBA was also hurt by a false rumor that alleged its client Sprint would attempt to cut costs by moving from high-cost leased tower space to less expensive locations. SBA s performance was also affected by a risk-off environment at the beginning of 2016 that led to underperformance of highly leveraged companies. The Fund s exposure to the energy sector was detrimental to performance. 7 The share price of Anadarko Petroleum dropped after it was revealed the company made an unsolicited preliminary offer to buy fellow petroleum and natural gas producer Apache. The news sparked a sell-off as investors previously saw Anadarko as a potential seller to larger oil companies. We sold our position in Anadarko by period-end. Although the IT sector as a whole performed well during the period, a number of individual companies hampered Fund results. Business-oriented social networking service LinkedIn suffered from a preliminary outlook for 2016 that was disappointing and signaled a more rapid deceleration in growth and lower profitability than expected. NetSuite, a business software developer, underperformed because of poor execution in its attempt to attract larger accounts. The company also suffered from relatively low profitability as investors rotated into more mature and highly profitable enterprise software products. Tyler Technologies, which creates software for the public sector, experienced a drop in share price as the broader market sold off and other high profile technology companies reported weak quarterly results. As managers of Franklin DynaTech Fund, at period-end we remained encouraged by the relative abundance of companies that we believe have strong long-term growth prospects trading at what we perceive to be attractive valuations. We believe it is these innovative, thought-leading companies that may promote economic advancement over the longer term. 5. The health care sector comprises biotechnology, health care equipment and supplies, health care providers and services, health care technology, life sciences tools and services, and pharmaceuticals in the SOI. 6. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. 7. The energy sector comprises energy equipment and services in the SOI. See for additional data provider information. 6 Semiannual Report FRANKLIN DYNATECH FUND Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. Matthew J. Moberg, CPA The foregoing information reflects our analysis, opinions and portfolio holdings as of March 31, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy. Rupert H. Johnson, Jr. Portfolio Management Team Semiannual Report 7 FRANKLIN DYNATECH FUND Performance Summary as of March 31, 2016 Your dividend income will vary depending on dividends or interest paid by securities in the Fund s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund s dividends and capital gain distributions, if any, and an
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