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UNAUDITED INTERIM REPORT For the Period from 1 Aril to 30 Franklin Temleton Funds AN AUTHORISED OPEN-ENDED INVESTMENT COMPANY WITH VARIABLE CAPITAL General Information FRANKLIN TEMPLETON FUNDS Head Office
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UNAUDITED INTERIM REPORT For the Period from 1 Aril to 30 Franklin Temleton Funds AN AUTHORISED OPEN-ENDED INVESTMENT COMPANY WITH VARIABLE CAPITAL General Information FRANKLIN TEMPLETON FUNDS Head Office Cannon Place 78 Cannon Street London EC4N 6HL AUTHORISED CORPORATE DIRECTOR, ADMINISTRATOR AND REGISTRAR Franklin Temleton Fund Management Limited Cannon Place 78 Cannon Street London EC4N 6HL DEPOSITARY BNY Mellon Trust & Deositary (UK) Limited 160 Queen Victoria Street London EC4V 4LA INVESTMENT ADVISERS Franklin Advisers, Inc. One Franklin Parkway San Mateo, CA , USA Franklin Mutual Advisers, LLC 101 John F. Kennedy Parkway Short Hills, NJ 07078, USA Franklin Temleton Fund Management Limited Cannon Place 78 Cannon Street London EC4N 6HL Franklin Temleton Investment Management Limited Cannon Place 78 Cannon Street London EC4N 6HL Temleton Asset Management Limited 7 Temasek Boulevard Suntec Tower One Singaore INDEPENDENT AUDITORS PricewaterhouseCooers LLP Atria One 144 Morrison Street Edinburgh EH3 8EX Contents General Information Inside Front Cover Reort of the Authorised Cororate Director* 2 Statement of Authorised Cororate Director s Resonsibilities 4 Franklin Diversified Growth Fund 6 Franklin Diversified Income Fund 16 Franklin Euroean Oortunities Fund 27 Franklin Mutual Shares Fund 37 Franklin Strategic Bond Fund 49 Franklin UK Equity Income Fund 61 Franklin UK Managers Focus Fund 74 Franklin UK Mid Ca Fund 84 Franklin UK Oortunities Fund 95 Franklin UK Rising Dividends Fund 105 Franklin UK Smaller Comanies Fund 115 Franklin US Oortunities Fund 126 Temleton Global Emerging Markets Fund 137 Temleton Global Total Return Bond Fund 146 Temleton Growth Fund 171 Further Information* 185 * Collectively these comrise the Authorised Cororate Director s Reort as required by the Financial Conduct Authority s Collective Investment Schemes Sourcebook ( COLL ). Unaudited Interim Long Form Reort 1 FRANKLIN TEMPLETON FUNDS (the Comany ) Reort of the Authorised Cororate Director The Comany The Comany is registered in the United Kingdom and is an authorised oen-ended investment comany with variable caital. It has an umbrella structure and as at 30 offered shares in 15 Funds: Franklin Diversified Growth Fund, Franklin Diversified Income Fund, Franklin Euroean Oortunities Fund, Franklin Mutual Shares Fund, Franklin Strategic Bond Fund, Franklin UK Equity Income Fund, Franklin UK Managers Focus Fund, Franklin UK Mid Ca Fund, Franklin UK Oortunities Fund, Franklin UK Rising Dividends Fund, Franklin UK Smaller Comanies Fund, Franklin US Oortunities Fund, Temleton Global Emerging Markets Fund, Temleton Global Total Return Bond Fund and Temleton Growth Fund. The Comany s registered number is SI and the address of its Head Office is Cannon Place, 78 Cannon Street, London, EC4N 6HL. The Comany s Shareholders are not liable for its debts beyond the amount subscribed. The Funds are ring-fenced, thus each Fund is treated as a searate entity and only those assets can be used to meet the liabilities attributable to that Fund. Each Fund has investment owers equivalent to those of a securities comany. Franklin Temleton Fund Management Limited, the Authorised Cororate Director ( ACD ), is authorised and regulated by the Financial Conduct Authority ( FCA ). The ACD may authorise the creation of additional Funds in the future with different investment objectives, subject to amendment of the Prosectus and FCA aroval. The ACD s rincial activity is investment management. This Semi-Annual Reort includes statements which show the financial ositions of both the Comany as a whole and each Fund individually. Searate investment reviews are rovided for each Fund. Franklin Advisers, Inc. ( FAI ) is Investment Adviser to Franklin US Oortunities Fund and Temleton Global Total Return Bond Fund. Franklin Mutual Advisers, LLC ( FMA ) is Investment Adviser to Franklin Mutual Shares Fund. Franklin Temleton Fund Management Limited ( FTFML ) is Investment Adviser to Franklin UK Equity Income Fund, Franklin UK Managers Focus Fund, Franklin UK Mid Ca Fund, Franklin UK Oortunities Fund, Franklin UK Rising Dividends Fund and Franklin UK Smaller Comanies Fund. Franklin Temleton Investment Management Limited ( FTIML ) is Investment Adviser to Franklin Diversified Growth Fund, Franklin Diversified Income Fund, Franklin Euroean Oortunities Fund, Franklin Strategic Bond Fund and Temleton Growth Fund. Temleton Asset Management Limited ( TAML ) is Investment Adviser to Temleton Global Emerging Markets Fund. FAI and FMA are regulated by the United States Securities and Exchange Commission. FTIML is authorised and regulated by the FCA. TAML is regulated by the United States Securities and Exchange Commission, the Hong Kong Securities and Futures Commission and the Monetary Authority of Singaore. The Investment Advisers rincial activity is investment management, and TAML also markets and distributes collective investment schemes in Singaore. The agreements between the Comany, the ACD and the Investment Advisers may be terminated at any time on the giving of three months notice. The Investment Advisers are associates of the ACD by virtue of being a body cororate in a grou in which the ACD is a member. The investment objectives and olicies of each Fund can be found in the further information section on ages 185 to 191. Significant Events From 1 July, the annual management charge for Class W Shares in Franklin UK Equity Income Fund, Franklin UK Oortunities Fund and Franklin UK Rising Dividends Fund was reduced from 0.75% er annum to 0.45% er annum. 2 Unaudited Interim Long Form Reort Reort of the Authorised Cororate Director (continued) ACD s Authorisation This Semi-Annual Reort has been aroved by the ACD for issue to Shareholders and has been signed in accordance with the requirements of the FCA s Collective Investment Schemes Sourcebook ( COLL ). Adrian White Director, Franklin Temleton Fund Management Limited Authorised Cororate Director 24 November Unaudited Interim Long Form Reort 3 Statement of Authorised Cororate Director s Resonsibilities The Oen-Ended Investment Comanies Regulations 2001 and COLL require the Authorised Cororate Director to reare financial statements for each accounting eriod which give a true and fair view of the financial osition of the Comany and of net income/exenditure and the net gains/losses on the roerty of the Comany for the eriod. In rearing the financial statements the Authorised Cororate Director is required to: select suitable accounting olicies and then aly them consistently; make adjustments and estimates that are reasonable and rudent; conform with the disclosure requirements of the Statement of Recommended Practice of Authorised Funds issued by the Investment Management Association in May 2014; comly with the disclosure requirements of the Prosectus and Instrument of Incororation; follow generally acceted accounting rinciles and alicable accounting standards; reare the financial statements on a going concern basis unless it is inaroriate to resume that the Comany will continue in business; kee roer accounting records which enable it to demonstrate that the financial statements, as reared, comly with the above requirements; and take reasonable stes for the revention and detection of fraud and non comliance with law or regulations. The Authorised Cororate Director is resonsible for the management of the Comany in accordance with its Prosectus. 4 Unaudited Interim Long Form Reort Accounting Policies The interim financial statements have been reared in accordance with FRS102 as modified by the Statement of Recommended Practice for Authorised Funds issued by the Investment Management Association in May The Statement of Recommended Practise for Authorised Funds ( SORP ) was udated by the Investment Management Association in May 2014 and came into effect for the year ended. Therefore, this interim reort has been reared in the line with the latest SORP. Unaudited Interim Long Form Reort 5 FRANKLIN DIVERSIFIED GROWTH FUND Investment Review Performance The Fund aims to achieve long-term caital growth and targets a return, over a rolling five-year eriod, equivalent to 5% over the Bank of England Base Rate (net of fees) each year. For the six months ended 30, Franklin Diversified Growth Fund returned -5.54%* net of fees, undererforming its benchmark, the Bank of England Base Rate, which returned 0.21% (both returns in UK sterling). The Fund aims to deliver its target return with a limited degree of volatility relative to other, comarable investments. At the end of the eriod, the Fund s forecast annualised volatility was 4.60%, substantially lower than the 11.32% forecast annualised volatility for the MSCI All-Country World Index. Overview In the six months to the end of, the US economy stayed in the Goldilocks zone: it roduced enough ositive data to encourage investors, but grew slowly enough for the US Federal Reserve (Fed) to ut off raising interest rates. An unexectedly large bout of quantitative easing (QE) by the Euroean Central Bank (ECB), as announced in March, took euro bond yields to new lows. The Bank of Jaan (BOJ) also continued its QE olicy and, at the end of, announced that it would start targeting long-term interest rates as well. Exansive monetary olicies contributed to the rise in financial markets, but couldn t revent a further slide in world economic growth. Growth in most develoed economies has been anaemic for some time, but growth in emerging markets is now also continuing to slow down. This is imortant because develoing countries account for most of the global economy s growth these days. Data from China, in articular, is often scrutinised as a harbinger of where the world economy is going. China s slowdown bears the hallmarks of a so-called soft landing, but it remains to be seen how far this gentle downtrend can be maintained, and what role fiscal and monetary olicy can lay. Commodity rices returned to strength in the six months under review. Brent Crude oil rose to US$50.02 by the end of, boosted by a mixture of suly cuts and cautious investor confidence. Iron ore, tin and coer all came off the lows they reached earlier this year as well, in a sign that the world economy may not be doing as badly as some investors once feared. Even gold, which some investors might exect to erform oorly in a low-inflation environment, rose to US$1,316 er troy ounce by the end of. Rising commodity rices lifted many emerging-market (EM) economies. However, it is far from clear whether commodity rices will strengthen any further, or if they will remain egged down at current levels, still low in historical ersective. Brexit reminded us how imortant olitical and event risks can be, even if they seem distant and unlikely. The UK s decision to leave the Euroean Union has had limited imact on the real economy till now, but it ushed sterling to new lows, triggered 10-year Bund yields into negative territory, and surred the Bank of England (BOE) to extend its QE rogramme. Whatever Brexit s longer-term effects may be, it reminds us to kee an eye on other olitical risks on the horizon: A Trum residency in the United States is ossible or the election s results may be disuted by one of the candidates; ucoming elections and referendums in Italy, Sain, Germany, France and other Euroean countries may throw the Euroean Union into further disarray; and geoolitical risks in the Middle East or Asia have the otential to influence world markets. The US Fed frequently hinted at further rate hikes these last six months, but has so far stayed on the sidelines December aears to be the next milestone. Meanwhile, most long-term bond yields are lower, more countries have negative interest rates and there is more quantitative easing now than at the beginning of the review eriod. Many investors wonder if monetary olicy can do any more, and the credibility of central banks is on the line. Although austerity has dominated many countries olitical agendas in the last few years, we increasingly see calls for fiscal olicy to lay a bigger role. It remains to be seen how such fiscal efforts might be financed. Significant Changes The Fund s management team identified a number of themes that drove its most significant investment decisions during the eriod under review, as well as the most substantial changes to the Fund s ortfolio: Global markets remained tenuously balanced: Most financial markets moved decisively higher after the * Figure differs from comarative table erformance due to alternative calculation methodology used. 6 Unaudited Interim Long Form Reort FRANKLIN DIVERSIFIED GROWTH FUND Investment Review (continued) Significant Changes (continued) UK s Brexit in late June raised investors hoes of more monetary stimulus. But before and after this eriod, market balance was often recarious, with occasional sikes in volatility based on, for examle, statements from Fed officials. Because of this uncertainty, the Fund increased its allocation to so-called carry strategies, which can generate rofits even if the market moves sideways. Our carry ositions included exosure to develoed markets, for examle to benefit from exosure to UK credit sreads, but also exosure to emerging markets, as with the Fund s investment in EM currencies, for examle the Indian ruee. Weak US dollar and stable emerging markets: A degree of stability returned to develoing economies and their financial markets in the six months under review. Some structural roblems ersisted, but this more stable environment led us to increase our allocation to emerging markets. Aside from the carry ositions mentioned above, this included, for examle, a modest new osition in emerging-market equities and emerging-market local debt. Risk remium strategies: As art of the Fund s move to increase its market-neutral ositions, we continued to invest in risk remium strategies in a number of asset classes. In commodities, for examle, the Fund disosed of a aired trade between individual commodities, but initiated a so-called commodity liquidity osition. This osition anticiates the eriodic rebalancing of commodity indices, and rovides liquidity to assive investors at the time when the index is rebalanced. Has monetary olicy reached its limits? Eight years after the Fed s first round of QE and after multile waves of QE in most develoed economies, many investors now wonder what more monetary olicy can do. More and more bonds carry negative yields, and many central banks balance sheets have ballooned. If increases in monetary suort are coming to an end, the bull market for bonds may also be under threat. With this in mind, we reduced the Fund s duration exosure by reducing the Fund s bond ositions in Australia and New Zealand. By the end of the eriod, the Fund was ositioned with a skew toward defensive strategies, which heled to reduce its ex-ante risk. Contributors and Detractors The Fund osted a negative absolute erformance in the eriod under review. This erformance stemmed mainly from its efforts to cature outerformance in UK equities, and from a short osition in Australian bank stocks, relative to the broader Australian market. The Fund s short osition in long-dated German Bunds also detracted from returns, as German bond yields droed to record lows during the eriod under review. By contrast, the Fund s osition in New Zealand sovereign bonds was the main contributor to erformance during the review eriod, as it benefited from rate cuts in March and August. The Fund received a further boost from its allocation to UK infrastructure. The Fund aims to achieve its target return with a degree of volatility that is lower than that of otherwise comarable investments. As of 30, the following ositions were key to its ex-ante risk rofile. Unaudited Interim Long Form Reort 7 FRANKLIN DIVERSIFIED GROWTH FUND Investment Review (continued) Contributors and Detractors (continued) To 5 contributors to risk (as of 30 ) Strategy Descrition Instrument Risk contribution (%) Defensive Long gold ETFS Physical Gold/Jersey Growth EM equities ishares MSCI Emerging Markets call otion Defensive US 30-year Treasuries CME Ultra Long Term US Treasury DEC16 Future 7.88 Growth EM local-currency sovereign bonds ishares Emerging Markets Local Government Bond 7.54 Stable US municial bonds arbitrage Deutsche Bank AG 11/05/ DB DMA5 Leveraged Index Structured Note 6.69 To 5 detractors from risk (as of 30 ) Strategy Descrition Instrument Risk detraction (%) Growth Short US long-dated Treasuries US 10-Year Note DEC16 Future Growth Short Swedish long-dated sovereign bonds Sweden 10-Year Note DEC16 Future 4.65 Defensive UK long-dated gilts UK Gilts DEC16 Future 1.89 Oortunistic EM versus develoed-market equities Long EM Equity Call Otion / Short Develoed-Markets Equity Call Otion 0.31 Stable Commodity liquidity strategy Citigrou INC TRS RCV CITI Commodities PAY 09/23/17 TRS 0.09 Outlook Desite recent ositive data, the world economy continues to face substantial medium-term challenges. We remain cautious on global economic growth, which may continue to decelerate. US cororate fundamentals are still weak, rofit margins are falling and investment remains low. Tailwinds from a weaker US dollar have turned out to be temorary. Jobs data in the United States has been variable these last months, occasionally falling short of exectations, but the long-term trend remains ositive. Markets are now focused on a ossible US rate hike in December. Economic data from Euroe and Jaan remains mixed as well, and the medium-term ath of the ECB and BoJ s olicies is not entirely clear. In, the ECB hinted (and subsequently denied) that it might scale back its monetary stimulus in the near future. The BOJ s new framework sees it trying to influence the shae of the entire yield curve, including long-term yields, but it remains to be seen how effective this olicy can be. Now that monetary stimulus aears to be nearing its limits, increased fiscal stimulus is being considered in most develoed economies. Many investors wonder, however, how national budgets will coe with this additional burden. The UK s economy fared better than exected by some, after the country s decision to leave the Euroean Union (EU). The BOE s larger-than-exected stimulus ackage announced in August heled ro u financial markets, but it remains to be seen what the longer-term effects of the country s Brexit will be. Emerging markets are likely to continue to outerform develoed markets in the near future, but structural roblems, such as high debt levels and deendence on commodity rices, ersist. Recent data out of China has been ositive, but mainly as a result of government stimulus and a raid increase in household leverage, articularly in the housing market. Asian trade data remains weak, and China s trading artners may have to wean themselves off their reliance on the Chinese economy. EM assets could come under renewed ressure if the US dollar were to strengthen further. At the end of, we continued to osition the Fund to benefit from any market downturns. Although this stance significantly imacted erformance during the six-month eriod under review, it is in line with our view of weakening economic fundamentals. In the ast, the Fund s ositioning has aid off at times of increased volatility, which we believe may well return. At the same time, the Fund s current ositioning may rovide a useful diversifier for many ortfolios, at a time when economic fundamentals are increasingly challenging central banks credibility. Toby Hayes, CFA & Matthias Hoe Fund Managers 30 8 Unaudited Interim Long Form Reort FRANKLIN DIVERSIFIED GROWTH FUND Comarative Table W Accumulation shares Change in net assets er share Oening net asset value er share n/a Return before oerating charges 2 (4.41) (12.33) n/a Oerating charges 3 (0.84) (0.91) (0.89) n/a Return after oerating charges* 4 (5.25) (13.24) n/a Closing net asset value er share n/a Retained di
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