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Franklin Templeton Investment Funds Franklin Brazil Opportunities Fund A SUB-FUND OF THE LUXEMBOURG-DOMICILED SICAV, FRANKLIN TEMPLETON INVESTMENT FUNDS (FTIF) July 27, 2012 Fund Details Inception Date
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Franklin Templeton Investment Funds Franklin Brazil Opportunities Fund A SUB-FUND OF THE LUXEMBOURG-DOMICILED SICAV, FRANKLIN TEMPLETON INVESTMENT FUNDS (FTIF) July 27, 2012 Fund Details Inception Date 27 July 2012 Investment Approach Benchmark(s) Share Class A (Acc) USD N (Acc) USD I (Acc) USD Total Return 40% JP Morgan EMBI Brazil Plus Index 40% IRF-M (Indice de Renda Fixe Mercado) Index 1 Hedged to USD 20% MSCI Brazil Index Identifiers ISIN LU CUSIP L4059D498 Bloomberg FTBOAAU LX ISIN LU CUSIP L4059D506 Bloomberg FTBONAU LX ISIN LU CUSIP L4059D514 Bloomberg FTBOIAU LX A (Qdis) USD ISIN LU N (Qdis) USD CUSIP L4059D670 Bloomberg FTBOADU LX ISIN LU CUSIP L4059D696 Bloomberg FTBONDU LX INVESTMENT OBJECTIVE Franklin Brazil Opportunities Fund (the Fund ) seeks to maximize, consistent with prudent investment management, total investment return consisting of a combination of capital appreciation, income and currency gains by investing across the entire range of available investment opportunities linked to Brazil. The Fund is a flexible multi-asset class strategy actively allocating across the entire range of available investment opportunities in Brazil seeking to achieve high sustainable alpha in all market environments. The Fund follows a total return approach aiming to minimize volatility with consistent returns actively managing various independent sources of alpha including Brazilian equities, Brazilian fixed-income, currency allocation, inflation, Brazilian spreads and volatility. Additionally, the high fixed-income yields in a country with solid fiscal dynamics and a domestically-driven economy with a growing middle class provides the potential for high distribution income as well as opportunities for capital appreciation. The investment management team has over a decade of asset management experience managing Brazilian assets, including equity, fixed-income and absolute return strategies. The specialized local team offers multiple research perspectives identifying and isolating the desired risk exposures and high conviction positions across markets and asset classes. The portfolio managers also share macro-economic research with one of the world s largest, most well established research teams the Franklin Templeton Fixed Income Team. The Fund takes advantage of an unconstrained view on Brazil independent from the benchmark, building on the solid track record of our Brazilian local asset management funds bringing the first fund of its type in the cross-border fund space. WHY CONSIDER THIS FUND Participation in Brazil s Dynamic Growth Story Brazil s economy continues to be one of the world s most vibrant. Long recognized as a global leader in commodities exports, on-going reforms have produced an economy with strong fundamentals and relatively solid fiscal dynamics. With favourable demographics, led by a young and growing population, rising income levels and an expanding middle class, a framework for increased domestic consumption and attractive long-term growth is solidly in place. Active Allocation to Capitalize on the Breadth of Brazil s Investment Opportunities The portfolio management team focuses on maximizing a combination of capital appreciation, income and currency gains by actively allocating the portfolio across the entire range of available Brazilian investment opportunities. This approach is driven by a strategy seeking high, sustainable alpha in all market conditions through both strategic and tactical asset allocation processes. A Combination of Local Expertise with Global Organizational Resources Established in 1997, Franklin Templeton Brazil has extensive experience managing Brazilian equity, fixed income and multi-asset class ( multimercado ) products, with dedicated experts for different markets and asset classes. 2 Today, as one of the Franklin Templeton Investments Local Asset Management ( LAM ) Group teams, they have access to the deep resources and global presence of the broader Franklin Templeton Investments organization. 1. Market cap index of Brazilian fixed rated bonds. 2. Franklin Templeton Investments and Banco Bradesco, one of Brazil s largest private sector banks, established a joint venture relationships in For All MSCI professional data is provided investor as use is. only. The portfolio Not for distribution described herein to retail is not investors sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates or any MSCI data provider have any liability 1 of any kind in connection with the MSCI data or the portfolio described herein. Copying or redistributing the MSCI data is strictly prohibited. INVESTMENT PHILOSOPHY & PROCESS The Fund will draw on the local expertise of Franklin Templeton Brazilian Equity and Fixed Income Teams. The portfolio managers will be supported by a local team of investment professionals, as well as the Local Asset Management Group and Global Fixed Income Team. The Fund will be managed by Stephen Dover, International Chief Investment Officer for Franklin Templeton Investments Local Asset Management group, Marco Freire, Brazil s Fixed Income Chief Investment Officer, and Frederico Sampaio, Brazil s Equity Chief Investment Officer. Local Asset Management refers to the strategic investments that Franklin Templeton Investments has made in local asset management companies around the world in order to leverage the expertise of well-qualified investment and financial services professionals who have first-hand knowledge of their domestic markets. The Fund s portfolio managers will take a research-driven approach that taps the expertise of dedicated on-the-ground research analysts collaborating with the broader Franklin Templeton Investments equity and fixed income organizations to provide in-depth industry, sector and security research. The portfolio management style relies on both bottom-up analysis that drives the security selection process as well as top-down macroeconomic analysis that drives asset allocation and positioning within interest rate, currency and inflation-linked securities markets. Franklin Templeton Investments Equity Team The Franklin Templeton Investments Brazilian Equity Team follows a fundamental approach based on a research-driven, bottom-up process focusing on companies across all market capitalizations. They seek to identify companies with superior growth potential that are trading at what they believe to be reasonable price levels (defined as margin of safety). They remain flexible in terms of the portfolio s market capitalization and liquidity profile in an effort to maintain consistent outperformance in all market environments. The goal is to provide the portfolio managers a framework to make targeted equity investments Franklin Templeton Investments Fixed Income Team The Franklin Templeton Investments Brazilian Fixed Income Team follows a long term value strategy that seeks to identify asymmetrical investment positions, where the skew assists in identifying potential opportunities. Their investment philosophy combines macro fundamental research to identify medium/long term trends and bottom up research with a focus on pricing/valuation. To protect the portfolios at a pre-determined or relatively low cost, the Fund seeks to broaden the number of active uncorrelated positions to improve diversification and to identify alternative positions. Both the Equity and Fixed Income Teams research process will seek to identify potential sources of alpha across multiple areas of the respective asset classes. Potential Sources of Alpha Brazilian Fixed Income Brazilian Equity Currency Interest Rate (Duration) Ideas Beta of Brazilian Equity Index Brazilian Real Exchange Rate Inflation-Linked Securities Specific Sector/Security Alpha Sovereign Credit Ideas Equity Volatility Options Volatility Ideas Currency Ideas COMPARABLE LOCAL STRATEGIES FTIF Franklin Brazil Opportunities Fund fixed-income and equity allocations will follow the same strategies and processes as the Brazilian-domiciled local Multimercado and equity portfolios. The Multimercado strategies are total return-orientated products which invest across the entire range of available investment opportunities (equities, fixed income, FX, etc.) in Brazil through a single vehicle. The asset allocation process is based on the appraisal of economic and political fundamentals for external and domestic scenarios. The aim of the asset allocation process is to consolidate the forecasts on assets relative to performance through a disciplined routine and to access expected portfolio risk and return. For professional investor use only. Not for distribution to retail investors. 2 PORTFOLIO CONSTRUCTION The portfolio managers determine the allocation between equity, fixed income and other investment instruments utilizing a combination of top-down economic and industry sector analysis and bottom-up research inputs. The asset allocation process explores both domestic and foreign scenarios, utilising an appraisal of economic and political fundamentals to drive a quantitative allocation model. The aim of the asset allocation process is to consolidate the relative performance forecasts for the fund s asset class opportunity set through a disciplined routine, and to identify the optimal portfolio expected return/risk profile through the use of quantitative models. The asset allocation process starts with Alternative economic scenarios being projected, each one being assigned a certain probability and a number of characteristics. These scenarios are based on our internal economic analysis. Probabilities of the alternative scenarios are then discussed until consensus is reached. Relevant economic variables, including inflation, interest rate curves and sovereign spread are estimated under each of the alternative scenarios. These variables help us to establish the expected returns of each asset class. Risk is calculated considering alternative estimates and probability. Other estimates of asset class returns are also utilized as a means of comparison. These include a bottom-up estimate for the upside of each market (based on the target prices for each individual asset), pricing ratio analysis, money flow coverage and secular trend analysis. The equity allocation will be managed by the equity team in a benchmark agnostic style that will allow significant deviation from the stated equity benchmarks. The team believes this is the most prudent approach from a total return perspective given the heavy concentration of the Brazilian equity indexes in commodity-related sectors. The fixed income allocation will be actively managed by the fixed income team based on various analyses on duration and convexity of the Brazilian yield curve, as well as currency risk. Investment Process Portfolio Construction Absolute and relative issuer and sector weightings will be closely monitored to ensure that the portfolio is structured to generate the best possible risk adjusted returns. The firm s risk management team, Portfolio Analysis and Investment Risk (PAIR) Group, work closely with portfolio managers on risk analysis and portfolio attribution. Additionally, issue size and expected trading liquidity are evaluated. Bond ratings are considered, but the investment decisions are based primarily on in-house, fundamental research. For professional investor use only. Not for distribution to retail investors. 3 Sell Discipline There is a continual assessment of opportunities in light of their return potential and portfolio risk impact. Portfolio managers will seek to sell a security if there has been a negative fundamental development that changes their view of the appropriate valuation or causes the team s analysts to revise their investment opinion, if the security has moved beyond the established fair value target, or if the team s views on macroeconomic or sector trends or valuations have changed. In addition, the portfolio managers may sell an asset that still meets their buy criteria if another asset becomes available in the new issue or secondary market that they believe has better return potential or improves the portfolio s risk profile. FEES & EXPENSES Retail Share Classes Institutional Share Class Management Fee 1.00% 0.70% Total Expense Ratio A share: 1.85% N share: 2.35% 1.05% *FTIF Franklin Brazil Opportunities Fund was seeded with US$7 million on July 27, 2012 RISK CONSIDERATIONS The fund intends to invest in a manner that is not materially impacted by overall market performance (bull or bear markets) in Brazil, and can deliver consistent performance throughout different market environments. The Fund, could, however be impacted by the following risks: The Fund may be impacted by currency fluctuations. During periods of extreme market volatility, the Brazilian Real has historically underperformed, which could impact the fund s performance as expressed in US dollars. The Fund can hold Brazilian bonds. A fixed income security value will generally increase in value when interest rates fall and decrease in value when interest rates increase. Market expectations about the evolution of interest rates in Brazil can change and affect the value of the bond holdings or, in the Fund s case, its net asset value. The value of Brazilian equities will be affected by economic, political, market and issuer specific risks. Although the Fund will only hold equities when the manager thinks that risk/return profiles are attractive, there is a risk that one or more companies in the portfolio will increase, or fail to increase, affecting the overall performance in any given period. Inflation Indexed securities have a tendency to react to changes in real interest rates. Real interest rates represent nominal interest rates lowered by the anticipated effect of inflation. Changes in expectations about Brazil inflation or Brazil nominal interest rate can affect the value of these securities and, in the Fund s case, its net asset value. The Fund can invest in Brazilian USD denominated bonds. Changes in market perception about the ability and/or willingness of the Brazilian government to pay the foreign obligations can affect the prices of these securities and, in the Fund s case, its net asset value. The Fund leverages the depth and experience of Franklin Templeton Investments 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 seeks 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 measures the active risk or tracking error of the portfolio versus the benchmark, identifies the sources of active risk (i.e., country, sector or style differences) and determines which specific issues are the largest contributors to active risk. The Fund s 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. In addition to Fund specific constraints and position limits, risk management is integrated into every aspect of the Fund s investment process. For professional investor use only. Not for distribution to retail investors. 4 Stephen H. Dover, CFA Managing Director International Chief Investment Officer Local Asset Management Franklin Templeton Investments Marco Freire Vice President Brazilian Fixed Income - CIO Portfolio Manager Sao Paulo, Brazil BENEFITS OF INVESTING IN A FUND FTIF Franklin Brazil Opportunities Fund actively allocates across the entire range of available investment opportunities in Brazil, investing in and tactically allocating across equity, fixed-income, currency and derivative securities offering the potential for high current income as well as capital appreciation. As a multi-asset vehicle, the new fund offers exposure to all of Brazil s capital markets providing the potential for more consistent and diversified returns than investing in a single asset class or individual securities. The Fund will provide the added advantage of active management and investment strategies that would be difficult for an individual investor to achieve on their own. The breadth and scale of Franklin Templeton s presence within the Brazilian marketplace and globally, as well as our over a decade of experience navigating Brazilian markets, provides value-add to investors seeking to take exposure to Brazil. While individual investors may be able to invest in individual Brazilian securities, it would be difficult for an individual investor to diversify their risk to specific securities (e.g. interest rates, currency, etc.) or be able to tactically increase or decrease exposure to all the different potential alpha sources available in the market, as they would by investing in FTIF Franklin Brazil Opportunities Fund. PORTFOLIO MANAGEMENT TEAM Stephen Dover, Franklin Advisers, is the lead manager for the Fund, and Marco Freire and Frederico Sampaio will function as the Fund s co-managers. Stephen H. Dover, based in San Mateo, CA, U.S., Stephen H. Dover is a managing director, international chief investment officer for Franklin Templeton Investment s Local Asset Management group. He is responsible for overseeing the investment functions of the locally managed and distributed products in South Korea, Brazil, China, India, Vietnam, Malaysia, Dubai, Japan and Australia. He also oversees the Franklin branded Asian equity growth products and World Perspectives Fund. Marco Freire, based in Sao Paulo, Brazil, is the Brazilian Fixed Income chief investment officer. He also serves as a portfolio manager and analyst for the Templeton Global Fixed Income Group, where he is co-portfolio manager on the emerging market strategy. Mr. Freire joined the firm in April 2007 as vice president and portfolio manager for the local Franklin Templeton Fixed Income Group. Prior to that he held a position as portfolio manager in Bank Boston Asset Management. Frederico Sampaio, based in Sao Paulo, Brazil, is vice president and Brazilian Equity chief investment officer. He is responsible for the domestic equity funds and also Brazilrelated funds and institutional accounts distributed outside of Brazil. Mr. Sampaio has 15 years of Brazilian capital markets experience. Previously, he was portfolio manager at Rio Bravo Investimentos and at Fundacao Petros, the pension fund of Petrobras, the Brazilian national oil company. Mr. Sampaio has also worked as economist at Bank of America Asset Management in Brazil. Frederico Sampaio, CFA Vice President Brazilian Equity CIO Portfolio Manager Sao Paulo, Brazil For professional investor use only. Not for distribution to retail investors. 5 CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. 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 (FTIF). 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. Given the rapidly changing market environment, Franklin Templeton Investments disclaim responsibility for updating this material. Subscriptions to shares of FTIF can only be made on the basis of the current prospectus and where available, the relevant Key Investor Information Document or any other offering documents, accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter. The value of shares in FTIF and income received from it can go down as well as up, and investors may not
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