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DECEMBER 31, 2010
ANNUAL REPORT
AND SHAREHOLDER LETTER
Franklin Templeton Conservative
Allocation Fund
(Formerly, Franklin Templeton Conservative
Target Fund)
Franklin Templeton Moderate
Allocation Fund
(Formerly, Franklin Templeton Moderate
Target Fund)
Franklin Templeton Growth
Allocation Fund
(Formerly, Franklin Templeton Growth
Target Fund)
Sign up for electronic delivery
on franklintempleton.com
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ASSET ALLOCATION
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Annual Report
Economic and Market Overview
During the 12-month period ended December 31, 2010, the U.S. economy grew unevenly, supported by a combination of fundamental business improvement and government intervention. Economic activity as measured by gross domestic product expanded at an annualized 3.7% pace in 2010’s first quarter and then downshifted to 1.7% annualized in the second quarter. Consumer spending picked up, likely due to pent-up post-recession demand, and the pace of growth rose at annualized rates of 2.6% in the third quarter and an estimated 3.2% in the fourth quarter. Globally, emerging market regions primarily led growth, as they were generally unconstrained by the debt overhang burdening western economies and benefited from strong intrinsic demand and significant capital inflows. Developed economies grew at a more subdued pace, with demand recovery and asset price reflation heavily underpinned by government-sponsored, liquidity-enhancing measures.
In the U.S., challenges such as mixed economic data, elevated debt concerns surrounding the U.S. budget deficit and a lack of job prospects for the unemployed hindered consumer confidence and the economy’s advance. Although home prices rose early in the year, home sales stalled as a homebuyer tax credit program ended, foreclosures mounted and the housing sector remained weak. The unemployment situation showed little improvement. Even though the jobless rate fell from 10.0% in December 2009 to 9.4% at period-end, some of the decline was attributable to a shrinking labor force as many unemployed workers stopped looking for jobs.1
Amid signs of a demand-led recovery, crude oil prices rose from $79 per barrel at the end of December 2009 to $91 per barrel by the end of December 2010 largely due to accelerating global demand. The pace of inflation slowed during the year, and in December 2010 the inflation rate was an annualized 1.5%.1 Similarly, core inflation, which excludes volatile food and energy costs, slowed to a 0.8% annualized rate.1
Given few inflationary pressures and uncertainty surrounding the economic recovery, the Federal Open Market Committee (FOMC) made no major changes to its monetary policy for most of the year. The FOMC repeatedly stated it would keep the federal funds target rate within the exceptionally low 0% to 0.25% range “for an extended period” and eventually shifted its focus to its outlook and the status of its current holdings. In September, the FOMC
1. Source: Bureau of Labor Statistics.
Annual Report | 3
revealed concerns about the subdued recovery and said inflation was below the pace “consistent with its mandate.” Having already lowered interest rates effectively to zero, the FOMC announced its intention to purchase government securities to stimulate the economy and promote a low level of inflation consistent with healthy economic growth.
Investor confidence shifted with each release of encouraging or discouraging economic, regulatory and political news, stoking considerable volatility among equities. Ultimately, global stock indexes posted solid gains during the 12 months under review as investor risk aversion began to subside amid generally improving economic signs and rising consumer spending. The dollar strengthened relative to the euro, which declined as a result of the region’s fiscal crisis, but weakened against the yen, which hit multi-decade highs amid persistent deflationary pressures. Meanwhile, U.S. Treasuries and corporate bonds finished the year with gains despite Treasury price declines late in the year.
The foregoing information reflects our analysis and opinions as of December 31, 2010. 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.
4 | Annual Report
Franklin Templeton Conservative Allocation Fund
(Formerly, Franklin Templeton Conservative Target Fund)
Your Fund’s Goal and Main Investments: Franklin Templeton Conservative Allocation
Fund seeks the highest level of long-term total return consistent with a lower level of risk.1
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. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.
This annual report for Franklin Templeton Conservative Allocation Fund covers the fiscal year ended December 31, 2010. Effective May 1, 2010, the Fund changed its name to help differentiate the Fund from our target-date funds. The Fund’s goal and main investment strategy remain unchanged.
Performance Overview
Franklin Templeton Conservative Allocation Fund – Class A delivered a +10.00% cumulative total return for the 12 months under review. By comparison, the Fund’s equity benchmarks, the Standard & Poor’s 500 Index (S&P 500), which tracks U.S. stocks, and the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index, which
1. The risk/reward potential is based on the Fund’s goal and level of risk. It is not indicative of the Fund’s actual or implied performance or portfolio composition, which may change on a continuous basis.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI, which begins on page 40.
Annual Report | 5
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measures global equity performance excluding the U.S. and Canada, posted total returns of +15.06% and +8.21%.2 The Fund’s fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which tracks U.S. investment-grade bonds, posted a +6.54% total return.2 The Payden & Rygel (P&R) 90 Day U.S. T-Bill Index, a proxy for short-term investments and other net assets, had a +0.13% total return for the same period.2 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 8.
Investment Strategy
Whenever possible, we attempt to hold the same underlying Franklin Templeton funds and other fund investments (fund investments) in each Allocation Fund’s portfolio and will vary the allocation percentages of the fund investments based upon each Allocation Fund’s risk/return level. Maintaining similarity of the fund investments across the Conservative, Moderate and Growth Allocation Funds is intended to increase the consistency of their results relative to one another. We allocate the Fund’s assets among the broad asset classes, and when selecting equity funds, we consider the fund investments’ foreign and domestic exposure, market capitalization ranges and investment styles (growth versus value). When selecting fixed income funds, we focus primarily on maximizing income appropriate to the Fund’s risk profile.
Manager’s Discussion
The Fund’s performance can be attributed to its allocation among equities, fixed income securities, and short-term investments and other net assets, and to the actual performance of the fund investments.
At period-end, Franklin Templeton Conservative Allocation Fund allocated 41.6% of total net assets to equity and 38.8% to fixed income. Domestic equity exposure was 69.7% of the total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2010, we held shares in large-, mid-and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund – Advisor Class, representing 9.7% of the Fund’s total net assets, was our largest equity fund weighting at period-end.
2. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not sponsor, endorse, sell or promote any S&P index-based product. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
6 | Annual Report
On the fixed income side, domestic exposure was 64.2% of the Fund’s total income weighting, with the balance represented by foreign fixed income. Franklin U.S. Government Securities Fund – Advisor Class was our largest fixed income fund weighting at 14.6% of total net assets.
Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund – Advisor Class, outperformed the S&P 500 during the 12-month reporting period, while our largest domestic value fund holding, Mutual Shares Fund – Class Z, underperformed. Our largest foreign equity fund holding, Mutual European Fund – Class Z, performed comparably to the MSCI EAFE Index. On the fixed income side, Franklin U.S. Government Securities Fund – Advisor Class underperformed the BC U.S. Aggregate Index, while Templeton Global Bond Fund – Advisor Class outperformed.
Thank you for your continued participation in Franklin Templeton Conservative Allocation Fund. We look forward to serving your future investment needs.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax7x1.jpg)
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T. Anthony Coffey, CFA Portfolio Manager
Franklin Templeton Conservative Allocation Fund
CFA® is a trademark owned by CFA Institute.
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2010, 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.
Annual Report | 7
Performance Summary as of 12/31/10
Franklin Templeton Conservative Allocation Fund
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 and graphs do 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 any unrealized gains or losses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax8x1.jpg)
8 | Annual Report
Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Average a nnual total return and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class B: contingent deferred sales c harge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; Class C: 1% CDSC in first year only;
Class R/Advisor Class: no sales charges.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax9x1.jpg)
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 franklintempleton.com or call (800) 342-5236.
The investment manager and administrator have contractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees and acqu ired fund fees and expenses) for each class of the Fund do not exceed 0.25% (other than certain nonroutine expenses) until 4/30/11.
Annual Report | 9
Performance Summary (continued)
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax10x1.jpg)
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Annual Report | 11
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Your Fund’s Expenses
Franklin Templeton Conservative Allocation Fund
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Annual Report | 13
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax14x1.jpg)
*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the fund investments, net of expense waivers, annualized for each class (A: 0.50%; B: 1.25%; C: 1.25%; R: 0.75%; and Advisor: 0.25%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month expense ratio including expenses of the fund investments, net of expense waivers, annualized for each class (A: 1.15%; B: 1.90%; C: 1.90%; R: 1.40%; and Advisor: 0.90%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
14 | Annual Report
Franklin Templeton Moderate Allocation Fund
(Formerly, Franklin Templeton Moderate Target Fund)
Your Fund’s Goal and Main Investments: Franklin Templeton Moderate Allocation Fund
seeks the highest level of long-term total return consistent with a moderate level of risk.1
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. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.
This annual report for Franklin Templeton Moderate Allocation Fund covers the fiscal year ended December 31, 2010. Effective May 1, 2010, the Fund changed its name to help differentiate the Fund from our target-date funds. The Fund’s goal and main investment strategy remain unchanged.
Performance Overview
Franklin Templeton Moderate Allocation Fund – Class A delivered a cumulative total return of +11.97% for the 12 months under review. By comparison, the Fund’s equity benchmarks, the Standard & Poor’s 500 Index (S&P 500), which tracks U.S. stocks, and the Morgan Stanley Capital International (MSCI)
1. The risk/reward potential is based on the Fund’s goal and level of risk. It is not indicative of the Fund’s actual or implied performance or portfolio composition, which may change on a continuous basis.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI, which begins on page 46.
Annual Report | 15
Top 10 Fund Holdings Franklin Templeton Moderate Allocation Fund 12/31/10 % of Total Net Assets |
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax16x1.jpg)
Europe, Australasia, Far East (EAFE) Index, which measures global equity performance excluding the U.S. and Canada, posted total returns of +15.06% and +8.21%.2 The Fund’s fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which tracks U.S. investment-grade bonds, posted a +6.54% total return.2 The Payden & Rygel (P&R) 90 Day U.S. T-Bill Index, a proxy for short-term investments and other net assets, had a +0.13% total return for the same period.2 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 18.
Investment Strategy
Whenever possible, we attempt to hold the same underlying Franklin Templeton funds and other fund investments (fund investments) in each Allocation Fund’s portfolio and will vary the allocation percentages of the fund investments based upon each Allocation Fund’s risk/return level. Maintaining similarity of the fund investments across the Conservative, Moderate and Growth Allocation Funds is intended to increase the consistency of their results relative to one another. We allocate the Fund’s assets among the broad asset classes, and when selecting equity funds, we consider the fund investments’ foreign and domestic exposure, market capitalization ranges and investment styles (growth versus value). When selecting fixed income funds, we focus primarily on maximizing income appropriate to the Fund’s risk profile.
Manager’s Discussion
The Fund’s performance can be attributed to its allocation among equities, fixed income securities, and short-term investments and other net assets, and to the actual performance of the fund investments.
At period-end, Franklin Templeton Moderate Allocation Fund allocated 56.4% of total net assets to equity and 33.4% to fixed income. Domestic equity exposure was 69.9% of the total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2010, we held shares in large-, mid-and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund – Advisor Class, representing 13.2% of the Fund’s total net assets, was our largest equity fund weighting at period-end. On
2. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
16 | Annual Report
the fixed income side, domestic exposure was 64.4% of the Fund’s total income weighting, with the balance represented by foreign fixed income. Franklin U.S. Government Securities Fund – Advisor Class was our largest fixed income fund weighting at 12.6% of total net assets.
Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund –Advisor Class, outperformed the S&P 500 during the 12-month reporting period, while our largest domestic value fund holding, Mutual Shares Fund –Class Z, underperformed. Our largest foreign equity fund holding, Mutual European Fund – Class Z, performed comparably to the MSCI EAFE Index. On the fixed income side, Franklin U.S. Government Securities Fund – Advisor Class underperformed the BC U.S. Aggregate Index, while Templeton Global Bond Fund – Advisor Class outperformed.
Thank you for your continued participation in Franklin Templeton Moderate Allocation Fund. We look forward to serving your future investment needs.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax17x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax17x2.jpg)
T. Anthony Coffey, CFA Portfolio Manager
Franklin Templeton Moderate Allocation Fund
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2010, 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.
Annual Report | 17
Performance Summary as of 12/31/10
Franklin Templeton Moderate Allocation Fund
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 and graphs do 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 any unrealized gains or losses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax18x1.jpg)
18 | Annual Report
Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Average a nnual total return and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class B: contingent deferred sales c harge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; Class C: 1% CDSC in first year only;
Class R/Advisor Class: no sales charges.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax19x1.jpg)
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 franklintempleton.com or call (800) 342-5236.
The investment manager and administrator have contractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees and acqu ired fund fees and expenses) for each class of the Fund do not exceed 0.25% (other than certain nonroutine expenses) until 4/30/11.
Annual Report | 19
Performance Summary (continued)
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax20x1.jpg)
20 | Annual Report
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![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax21x4.jpg)
Annual Report | 21
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax22x1.jpg)
Your Fund’s Expenses
Franklin Templeton Moderate Allocation Fund
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Annual Report | 23
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax24x1.jpg)
*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the fund investments, net of expense waivers, annualized for each class (A: 0.50%; B: 1.25%; C: 1.25%; R: 0.75%; and Advisor: 0.25%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month expense ratio including expenses of the fund investments, net of expense waivers, annualized for each class (A: 1.22%; B: 1.97%; C: 1.97%; R: 1.47%; and Advisor: 0.97%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
24 | Annual Report
Franklin Templeton Growth Allocation Fund
(Formerly, Franklin Templeton Growth Target Fund)
Your Fund’s Goal and Main Investments: Franklin Templeton Growth Allocation Fund
seeks the highest level of long-term total return consistent with a higher level of risk.1
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. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.
This annual report for Franklin Templeton Growth Target Fund covers the fiscal year ended December 31, 2010. Effective May 1, 2010, the Fund its name to help differentiate the Fund from our target-date funds. The Fund’s goal and main investment strategy remain unchanged.
Performance Overview
Franklin Templeton Growth Allocation Fund – Class A delivered a +14.31% cumulative total return for the 12 months under review. By comparison, the Fund’s equity benchmarks, the Standard & Poor’s 500 Index (S&P 500), which tracks U.S. stocks, and the Morgan Stanley Capital International (MSCI) Europe,
1. The risk/reward potential is based on the Fund’s goal and level of risk. It is not indicative of the Fund’s actual or implied performance or portfolio composition, which may change on a continuous basis.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI, which begins on page 52.
Annual Report | 25
Top 10 Fund Holdings Franklin Templeton Growth Allocation Fund 12/31/10 % of Total Net Assets |
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax26x1.jpg)
Australasia, Far East (EAFE) Index, which measures global equity performance excluding the U.S. and Canada, posted total returns of +15.06% and +8.21%.2 The Fund’s fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which tracks U.S. investment-grade bonds, posted a +6.54% total return.2 The Payden & Rygel (P&R) 90 Day U.S. T-Bill Index, a proxy for short-term investments and other net assets, had a +0.13% total return for the same period.2 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 28.
Investment Strategy
Whenever possible, we attempt to hold the same underlying Franklin Templeton funds and other fund investments (fund investments) in each Allocation Fund’s portfolio and will vary the allocation percentages of the fund investments based upon each Allocation Fund’s risk/return level. Maintaining similarity of the fund investments across the Conservative, Moderate and Growth Allocation Funds is intended to increase the consistency of their results relative to one another. We allocate the Fund’s assets among the broad asset classes, and when selecting equity funds, we consider the fund investments’ foreign and domestic exposure, market capitalization ranges and investment styles (growth versus value). When selecting fixed income funds, we focus primarily on maximizing income appropriate to the Fund’s risk profile.
Manager’s Discussion
The Fund’s performance can be attributed to its allocation among equities, fixed income securities, and short-term investments and other net assets, and to the actual performance of the fund investments.
At period-end, Franklin Templeton Growth Allocation Fund allocated 81.3% of total net assets to equity and 15.4% to fixed income. Domestic equity exposure was 70.6% of the total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2010, we held shares in large-, mid-and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund – Advisor Class, representing 19.4% of the
2. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
26 | Annual Report
Fund’s total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 66.2% of the Fund’s total income weighting, with the balance represented by foreign fixed income. Franklin U.S. Government Securities Fund – Advisor Class was our largest fixed income fund weighting at 5.4% of total net assets.
Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund – Advisor Class, outperformed the S&P 500 during the 12-month reporting period, while our largest domestic value fund holding, Mutual Shares Fund – Class Z, underperformed. Our largest foreign equity fund holding, Mutual European Fund – Class Z, performed comparably to the MSCI EAFE Index. On the fixed income side, Franklin U.S. Government Securities Fund – Advisor Class underperformed the BC U.S. Aggregate Index, while Templeton Global Bond Fund – Advisor Class outperformed.
Thank you for your continued participation in Franklin Templeton Growth Allocation Fund. We look forward to serving your future investment needs.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax27x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax27x2.jpg)
T. Anthony Coffey, CFA Portfolio Manager
Franklin Templeton Growth Allocation Fund
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2010, 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.
Annual Report | 27
Performance Summary as of 12/31/10
Franklin Templeton Growth Allocation Fund
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 and graphs do 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 any unrealized gains or losses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax28x1.jpg)
28 | Annual Report
Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class B: contingent deferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; Class C: 1% CDSC in first year only;
Class R/Advisor Class: no sales charges.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax29x1.jpg)
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 f rom figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
The investment manager and administrator have co ntractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.25% (other than certain nonroutine expenses) until 4/30/11.
Annual Report | 29
Performance Summary (continued)
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax30x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax31x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax31x2.jpg)
Annual Report | 31
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax32x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax32x2.jpg)
Your Fund’s Expenses
Franklin Templeton Growth Allocation Fund
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Annual Report | 33
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax34x1.jpg)
*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the fund expenses, net of expense waivers, annualized for each class (A: 0.50%; B: 1.25%; C: 1.25%; R: 0.75%; and Advisor: 0.25%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month expense ratio including expenses of the fund expenses, net of expense waivers, annualized for each class (A: 1.32%; B: 2.07%; C: 2.07%; R: 1.57%; and Advisor: 1.07%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
34 | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights
Franklin Templeton Conservative Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax35x1.jpg)
Annual Report | The accompanying notes are an integral part of these financial statements. | 35
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Conservative Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax36x1.jpg)
36 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Conservative Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax37x1.jpg)
Annual Report | The accompanying notes are an integral part of these financial statements. | 37
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Conservative Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax38x1.jpg)
38 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Conservative Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax39x1.jpg)
Annual Report | The accompanying notes are an integral part of these financial statements. | 39
Franklin Templeton Fund Allocator Series
Statement of Investments, December 31, 2010
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax40x1.jpg)
See Abbreviations on page 71.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax40x2.jpg)
40 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights
Franklin Templeton Moderate Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax41x1.jpg)
Annual Report | The accompanying notes are an integral part of these financial statements. | 41
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Moderate Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax42x1.jpg)
42 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Moderate Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax43x1.jpg)
Annual Report | The accompanying notes are an integral part of these financial statements. | 43
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Moderate Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax44x1.jpg)
44 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Moderate Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax45x1.jpg)
Annual Report | The accompanying notes are an integral part of these financial statements. | 45
Franklin Templeton Fund Allocator Series
Statement of Investments, December 31, 2010
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax46x1.jpg)
46 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights
Franklin Templeton Growth Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax47x1.jpg)
Annual Report | The accompanying notes are an integral part of these financial statements. | 47
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Growth Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax48x1.jpg)
48 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Growth Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax49x1.jpg)
Annual Report | The accompanying notes are an integral part of these financial statements. | 49
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Growth Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax50x1.jpg)
50 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
Franklin Templeton Growth Allocation Fund
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax51x1.jpg)
Annual Report | The accompanying notes are an integral part of these financial statements. | 51
Franklin Templeton Fund Allocator Series
Statement of Investments, December 31, 2010
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax52x1.jpg)
See Abbreviations on page 71.
aNon-income producing.
bSee Note 7 regarding investments in Underlying Funds.
52 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Statements
Statements of Assets and Liabilities
December 31, 2010
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Annual Report | The accompanying notes are an integral part of these financial statements. | 53
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
Statements of Assets and Liabilities (continued)
December 31, 2010
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54 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
Statements of Operations
for the year ended December 31, 2010
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Annual Report | The accompanying notes are an integral part of these financial statements. | 55
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
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56 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
Statements of Changes in Net Assets (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 57
Franklin Templeton Fund Allocator Series
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Fund Allocator Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of nine separate funds, three of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The Funds invest primarily in Franklin Templeton mutual funds (Underlying Funds). The Funds offer five classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
Effective May 1, 2010, the following name changes occurred:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax58x1.jpg)
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day. Exchange Traded Funds (ETFs) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively.
b. Income Taxes
It is each fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. Each fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. Each fund’s application of those tax rules is subject to its understanding. Each fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of December 31, 2010, and for all open tax year s, each fund has determined that no provision for income tax is required in each fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation. Each fund is not aware of any tax position for which it is reasonably possible that the total amounts of unrecognized tax effects will significantly change in the next twelve months.
58 | Annual Report
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
c. | Security Transactions, Investment Income, Expenses and Distributions |
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds and ETFs are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
The Funds indirectly bear their proportionate share of expenses from the Underlying Funds and ETFs. Since the Underlying Funds and ETFs have varied expense levels and the Funds may own different proportions of the Underlying Funds and ETFs at different times, the amount of expenses incurred indirectly by the Funds will vary.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
d. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
e. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
Annual Report | 59
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2010, there were an unlimited number of shares authorized (without par value).
Transactions in the Funds’ shares were as follows:
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60 | Annual Report
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
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Annual Report | 61
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
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Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Funds are also officers and/or directors/trustees of certain of the Underlying Funds and of the following subsidiaries:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax63x1.jpg)
a. Asset Allocation Fees
The Funds pay an asset allocation fee to Advisers of 0.25% per year of the average daily net assets of each of the Funds for investment advisory services, consisting principally of determining the allocation of assets of the Funds among the designated Underlying Funds and ETFs.
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Funds.
c. Distribution Fees
The Trust’s Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds’ Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Funds’ Class B, C and R compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund’s shares up to the maximum annual plan rate for each class.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax63x2.jpg)
Annual Report | 63
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
3. | TRANSACTIONS WITH AFFILIATES (continued) |
d. | Sales Charges/Underwriting Agreements |
Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds’ shares for the year:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax64x1.jpg)
Statements of Operations of which the following amounts were retained by Investor Services:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax64x2.jpg)
Advisers has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Funds so that the common expenses (i.e. a combination of asset allocation fees and other expenses, but excluding distribution fees, and acquired fund fees and expenses) for each class of the Funds do not exceed 0.25% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2011.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds’ custodian expenses. During the year ended December 31, 2010, there were no credits earned.
64 | Annual Report
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2010, the capital loss carryforwards were as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax65x1.jpg)
The tax character of distributions paid during the years ended December 31, 2010 and 2009, was as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax65x2.jpg)
At December 31, 2010, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax65x3.jpg)
Annual Report | 65
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
5. INCOME TAXES (continued)
Net investment income differs for financial statement and tax purposes primarily due to differing treatment of short term capital gains distributions from Underlying Funds and ETFs.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and short term capital gains distributions from Underlying Funds and ETFs.
6. INVESTMENT TRANSACTIONS
Purchases and sales of Underlying Funds and ETFs (excluding short term securities) for the year ended December 31, 2010, were as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax66x1.jpg)
7. INVESTMENTS IN UNDERLYING FUNDS
The Funds invest primarily in the Underlying Funds which are managed by Advisers, (or an affiliate of Advisers). The Funds do not invest in the Underlying Funds for the purpose of exercising a controlling influence over the management or policies.
The Funds may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Asset allocation fees are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
Investments in Underlying Funds for the year ended December 31, 2010, were as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax66x2.jpg)
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
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Annual Report | 67
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
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Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fasax69x1.jpg)
8. SPECIAL SERVICING AGREEMENT
The Funds participate in a Special Servicing Agreement (SSA) with the Underlying Funds and certain service providers of the Funds and of the Underlying Funds. Under the SSA, each Underlying Fund may pay a portion of the Funds’ expenses (other than any asset allocation, administrative, and distribution fees) to the extent such payments are less than the amount of the benefits realized or expected to be realized by the Underlying Fund (e.g., due to reduced costs associated with servicing accounts) from the investment in the Underlying Fund by the Funds. The amount of expenses borne by the Underlying Funds during the year ended December 31, 2010 is noted in the Statements of Operations.
9. CREDIT FACILITY
The Funds, together with other U.S. registered and foreign investment funds (collectively “Borrowers”), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on
Annual Report | 69
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
9. CREDIT FACILITY (continued)
January 21, 2011. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.10% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statements of Operations. During the year ended December 31, 2010, the Funds did not use the Global Credit Facility.
Effective January 21, 2011, the Borrowers renewed the Global Credit Facility for a total of $750 million, maturing January 20, 2012.
10. FAIR VALUE MEASUREMENTS
The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds’ own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ investments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical securities
- Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
For movements between the levels within the fair value hierarchy, the Funds have adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
At December 31, 2010, all of the Funds’ investments in Underlying Funds and ETFs carried at fair value were in Level 1 inputs. For detailed Underlying Fund and ETFs categories, see the accompanying Statements of Investments.
70 | Annual Report
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
11. SUBSEQUENT EVENTS
The Funds have evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.
ABBREVIATIONS
Selected Portfolio
ETF - Exchange Traded Fund
Annual Report | 71
Franklin Templeton Fund Allocator Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Franklin Templeton Fund Allocator Series
In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Templeton Conservative Allocation Fund, Franklin Templeton Moderate Allocation Fund, and Franklin Templeton Growth Allocation Fund, (separate portfolios of Franklin Templeton Allocator Series, hereafter referred to as the “Funds”) at December 31, 2010, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter re ferred to as “financial statements”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments at December 31, 2010 by correspondence with the transfer agent of the Underlying Funds and custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 14, 2011
72 | Annual Report
Franklin Templeton Fund Allocator Series
Tax Designation (unaudited)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Funds designate the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2010:
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under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2010:
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Distributions, including qualified dividend income, paid during calendar year 2010 will be reported to shareholders on Form 1099-DIV in January 2011. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns.
Annual Report | 73
Franklin Templeton Fund Allocator Series
Board Members and Officers
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person’s successor is elected and qualified.
Independent Board Members
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Franklin Templeton Fund Allocator Series
Shareholder Information
Proxy Voting Policies and Procedures
The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
Householding of Reports and Prospectuses
You will receive each Fund’s financial reports every six months as well as an annual updated summary prospectus (prospectus available upon request). To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and summary prospectus. This process, called “householding,” will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at (800) 632-2301. At any time you may view current prospectuses/summary prospectuses and financial reports on our website. If you choose, you may receive these documents through electronic delivery.
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Annual Report and Shareholder Letter
FRANKLIN TEMPLETON
FUND ALLOCA TOR SERIES
Investment Manager
Franklin Advisers, Inc.
Distributor
Franklin Templeton Distributors, Inc.
(800) DIAL BEN®
franklintempleton. com
Shareholder Services
(800) 632-2301
Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone.
© 2011 Franklin Templeton Investments. All rights reserved.
FAS A 02/11
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Annual Report
Economic and Market Overview
During the 12-month period ended December 31, 2010, the U.S. economy grew unevenly, supported by a combination of fundamental business improvement and government intervention. Economic activity as measured by gross domestic product expanded at an annualized 3.7% pace in 2010’s first quarter and then downshifted to 1.7% annualized in the second quarter. Consumer spending picked up, likely due to pent-up post-recession demand, and the pace of growth rose at annualized rates of 2.6% in the third quarter and an estimated 3.2% in the fourth quarter. Globally, emerging market regions primarily led growth, as they were generally unconstrained by the debt overhang burdening western economies and benefited from strong intrinsic demand and significant capital inflows. Developed economies grew at a more subdued pace, with demand recovery and asset price reflation heavily underpinned by government-sponsored, liquid ity-enhancing measures.
In the U.S., challenges such as mixed economic data, elevated debt concerns surrounding the U.S. budget deficit and a lack of job prospects for the unemployed hindered consumer confidence and the economy’s advance. Although home prices rose early in the year, home sales stalled as a homebuyer tax credit program ended, foreclosures mounted and the housing sector remained weak. The unemployment situation showed little improvement. Even though the jobless rate fell from 10.0% in December 2009 to 9.4% at period-end, some of the decline was attributable to a shrinking labor force as many unemployed workers stopped looking for jobs.1
Amid signs of a demand-led recovery, crude oil prices rose from $79 per barrel at the end of December 2009 to $91 per barrel by the end of December 2010 largely due to accelerating global demand. The pace of inflation slowed during the year, and in December 2010 the inflation rate was an annualized 1.5%.1 Similarly, core inflation, which excludes volatile food and energy costs, slowed to a 0.8% annualized rate.1
Given few inflationary pressures and uncertainty surrounding the economic recovery, the Federal Open Market Committee (FOMC) made no major changes to its monetary policy for most of the year. The FOMC repeatedly stated it would keep the federal funds target rate within the exceptionally low 0% to 0.25% range “for an extended period” and eventually shifted its focus to its outlook and the status of its current holdings. In September, the FOMC
1. Source: Bureau of Labor Statistics.
Annual Report | 3
revealed concerns about the subdued recovery and said inflation was below the pace “consistent with its mandate.” Having already lowered interest rates effectively to zero, the FOMC announced its intention to purchase government securities to stimulate the economy and promote a low level of inflation consistent with healthy economic growth.
Investor confidence shifted with each release of encouraging or discouraging economic, regulatory and political news, stoking considerable volatility among equities. Ultimately, global stock indexes posted solid gains during the 12 months under review as investor risk aversion began to subside amid generally improving economic signs and rising consumer spending. The dollar strengthened relative to the euro, which declined as a result of the region’s fiscal crisis, but weakened against the yen, which hit multi-decade highs amid persistent deflationary pressures. Meanwhile, U.S. Treasuries and corporate bonds finished the year with gains despite Treasury price declines late in the year.
The foregoing information reflects our analysis and opinions as of December 31, 2010. 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.
4 | Annual Report
Franklin Templeton Corefolio Allocation Fund
Your Fund’s Goal and Main Investments: Franklin Templeton Corefolio Allocation Fund seeks capital appreciation through investments in a combination of Franklin Flex Cap Growth Fund, Franklin Growth Fund, Mutual Shares Fund and Templeton Growth Fund.
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. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.
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This annual report for Franklin Templeton Corefolio Allocation Fund covers the fiscal year ended December 31, 2010.
Performance Overview
Franklin Templeton Corefolio Allocation Fund – Class A delivered a +13.13% cumulative total return for the 12 months under review. In comparison with its benchmarks, the Fund outperformed the +12.34% total return of the Morgan Stanley Capital International (MSCI) World Index, which tracks equity performance in global developed markets, while it underperformed U.S. stocks as measured by the broad Standard & Poor’s 500 Index’s (S&P 500’s) +15.06% total return.1 You can find other performance data in the Performance Summary beginning on page 7.
Investment Strategy
The Fund invests its assets allocated approximately 25% each in Franklin Flex Cap Growth Fund, Franklin Growth Fund, Mutual Shares Fund and Templeton Growth Fund. These underlying funds, in turn, invest primarily in U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund’s allocations to maintain the predetermined weightings in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages.
1. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not sponsor, endorse sell or promote any S&P index-based product. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI, which begins on page 28.
Annual Report | 5
Portfolio Review
The Fund’s performance can be attributed largely to maintaining a relatively static allocation among domestic and foreign equities, fixed income securities, and short-term investments and other net assets, and to the actual performance of the selected underlying funds.
During the period under review, compared to the S&P 500 Index, Franklin Flex Cap Growth Fund – Advisor Class outperformed, Franklin Growth Fund – Advisor Class performed comparably and Mutual Shares Fund – Class Z underperformed. Templeton Growth Fund – Advisor Class underperformed the MSCI World Index.
Thank you for your continued participation in Franklin Templeton Corefolio Allocation Fund. We look forward to serving your future investment needs.
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T. Anthony Coffey, CFA
Vice President of Franklin Advisers, Inc.
Franklin Templeton Corefolio Allocation Fund
CFA® is a trademark owned by CFA Institute.
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2010, 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.
6 | Annual Report
Performance Summary as of 12/31/10
Franklin Templeton Corefolio Allocation Fund
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 and graphs do 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 any unrealized gains or losses.
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Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class B: contingent deferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; Class C: 1% CDSC in first year only;
Class R/Advisor Class: no sales charges.
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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 f rom figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
The administrator has contractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.10% (other than certain nonroutine expenses) until 4/30/11.
8 | Annual Report
Performance Summary (continued)
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
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Endnotes
Because the Fund invests in underlying funds that may engage in a variety of investment strategies involving certain risks, this fund of funds may be subject to those same risks. Stocks have historically outperformed other asset classes over the long term, but tend to fluctuate more dramatically over the shorter term. Foreign investing carries additional risks such as currency and market volatility, and political or social instability, risks which are heightened in developing countries. Smaller or relatively new or unseasoned companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Value securities may not increase in price as anticipated or may decline further in value. Bond prices generally move in the opposite direction of interest rates. These and other risks, including investments in specialized indu stry sectors such as the technology sector, which has been among the most volatile in the market, are discussed in the Fund’s prospectus. The Fund’s prospectus also includes a description of the main investment risks.
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1. If the administrator had not waived fees, the Fund’s total returns would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s prospectus current as of the date of this report and include the effect of acquired fund fees and expenses. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
6. Source: © 2011 Morningstar. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total U.S. equity market performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets.
Annual Report | 11
Your Fund’s Expenses
Franklin Templeton Corefolio Allocation Fund
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
12 | Annual Report
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
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*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.38%; B: 1.10%; C: 1.10%; R: 0.60%; and Advisor: 0.10%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.16%; B: 1.88%; C: 1.88%; R: 1.38%; and Advisor: 0.88%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
Annual Report | 13
Franklin Templeton
Founding Funds Allocation Fund
Your Fund’s Goals and Main Investments: Franklin Templeton Founding Funds
Allocation Fund’s principal investment goal is capital appreciation, with a secondary goal of income. The Fund invests in an equally weighted combination of Franklin Income Fund, Mutual Shares Fund and Templeton Growth Fund.
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. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fas2ax14x1.jpg)
This annual report for the Franklin Templeton Founding Funds Allocation Fund covers the fiscal year ended December 31, 2010.
Performance Overview
Franklin Templeton Founding Funds Allocation Fund – Class A delivered a +10.61% cumulative total return for the 12 months under review. In comparison with its benchmarks, the Fund underperformed the +15.06% total return of the Standard & Poor’s 500 Index (S&P 500), which tracks U.S. stocks, and the +12.34% total return of the Morgan Stanley Capital International (MSCI) World Index, which tracks equity performance in global developed markets.1 You can find other performance data in the Performance Summary beginning on page 16.
Investment Strategy
The Fund invests its assets in an equally weighted combination of Franklin Income Fund, Mutual Shares Fund and Templeton Growth Fund. These underlying funds, in turn, invest primarily in U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund’s allocations to maintain the predetermined equal weightings of approximately 33 1 / 3% of total net assets in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages.
1. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI, which begins on page 34.
14 | Annual Report
Portfolio Review
The Fund’s performance can be attributed largely to maintaining a relatively static allocation among domestic and foreign equities, fixed income securities, and short-term investments and other net assets, and to the actual performance of the selected underlying funds.
During the period under review, Franklin Income Fund – Advisor Class and Mutual Shares Fund – Class Z underperformed the S&P 500. Templeton Growth Fund – Advisor Class underperformed the MSCI World Index.
Thank you for your continued participation in Franklin Templeton Founding Funds Allocation Fund. We look forward to serving your future investment needs.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fas2ax15x1.jpg)
T. Anthony Coffey, CFA
Vice President of Franklin Advisers, Inc.
Franklin Templeton Founding Funds Allocation Fund
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2010, 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.
Annual Report | 15
Performance Summary as of 12/31/10
Franklin Templeton Founding Funds Allocation Fund
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 and graphs do 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 any unrealized gains or losses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fas2ax16x1.jpg)
16 | Annual Report
Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class B: contingent deferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; Class C: 1% CDSC in first year only;
Class R/Advisor Class: no sales charges.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fas2ax17x1.jpg)
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 f rom figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
The administrator has contractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.10% (other than certain nonroutine expenses) until 4/30/11.
Annual Report | 17
Performance Summary (continued)
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
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18 | Annual Report
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Endnotes
Because the Fund invests in underlying funds that may engage in a variety of investment strategies involving certain risks, the Fund may be subject to these same risks. Stocks historically have outperformed other asset classes over the long term, but tend to fluctuate more dramatically over the short term. Bonds are affected by changes in interest rates and the creditworthiness of their issuers. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds adjust to a rise in interest rates, the Fund’s share price may decline. Higher yielding, lower rated corporate bonds entail a greater degree of credit risk compared to investment-grade securities. Foreign investing, especially in developing countries, carries additional risks such as currency and market volatility, and political or social instability, risks which are heightened in developing countries. Value securities may no t increase in price as anticipated or may decline further in value. The Fund’s prospectus also includes a description of the main investment risks.
1. If the administrator had not waived fees, the Fund’s total returns would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s prospectus current as of the date of this report and include the effect of acquired fund fees and expenses. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
6. Source: © 2011 Morningstar. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total U.S. equity market performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets.
20 | Annual Report
Your Fund’s Expenses
Franklin Templeton Founding Funds Allocation Fund
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Annual Report | 21
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fas2ax22x1.jpg)
*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.35%; B: 1.10%; C: 1.09%; R: 0.60%; and Advisor: 0.10%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.08%; B: 1.83%; C: 1.82%; R: 1.33%; and Advisor: 0.83%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
22 | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights
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Annual Report | The accompanying notes are an integral part of these financial statements. | 23
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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24 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 25
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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26 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 27
Franklin Templeton Fund Allocator Series
Statement of Investments, December 31, 2010
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28 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights
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Annual Report | The accompanying notes are an integral part of these financial statements. | 29
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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30 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 31
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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32 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 33
Franklin Templeton Fund Allocator Series
Statement of Investments, December 31, 2010
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34 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Statements
Statements of Assets and Liabilities
December 31, 2010
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Annual Report | The accompanying notes are an integral part of these financial statements. | 35
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
Statements of Assets and Liabilities (continued)
December 31, 2010
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36 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
Statements of Operations
for the year ended December 31, 2010
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Annual Report | The accompanying notes are an integral part of these financial statements. | 37
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
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38 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Fund Allocator Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of nine separate funds, two of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The Funds invest primarily in Franklin Templeton mutual funds (Underlying Funds). The Funds offer five classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day.
b. Income Taxes
It is each fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. Each fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. Each fund’s application of those tax rules is subject to its understanding. Each fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of December 31, 2010, and for all open tax year s, each fund has determined that no provision for income tax is required in each fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation. Each fund is not aware of any tax position for which it is reasonably possible that the total amounts of unrecognized tax effects will significantly change in the next twelve months.
c. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally
Annual Report | 39
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
c. | Security Transactions, Investment Income, Expenses and Distributions (continued) |
accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
The Funds indirectly bear their proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Funds may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Funds will vary.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
d. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
e. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
40 | Annual Report
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2010, there were an unlimited number of shares authorized (without par value).
Transactions in the Funds’ shares were as follows:
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Annual Report | 41
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
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Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Funds are also officers and/or directors/trustees of certain of the Underlying Funds and of the following subsidiaries:
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a. Administrative Fees
The Funds pay an administrative fee to FT Services of 0.10% per year of the average daily net assets of each of the Funds for administrative services including monitoring and rebalancing the percentage of each Fund’s investment in the Underlying Funds.
b. Distribution Fees
The Trust’s Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds’ Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Funds’ Class B, C and R compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund’s shares up to the maximum annual plan rate for each class.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
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The Board of Trustees has set the current rate at 0.30% per year for Class A shares for the Franklin Templeton Corefolio Allocation Fund and at 0.25% for Class A shares for the Franklin Templeton Founding Funds Allocation Fund until further notice and approval by the Board.
Annual Report | 43
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
3. | TRANSACTIONS WITH AFFILIATES (continued) |
c. | Sales Charges/Underwriting Agreements |
Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds’ shares for the year:
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d. Transfer Agent Fees
For the year ended December 31, 2010, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
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FT Services has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Funds so that the common expenses (i.e. a combination of administrative fees and other expenses, but excluding distribution fees, and acquired fund fees and expenses) for each class of the Funds do not exceed 0.10% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2011.
4. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2010, the capital loss carryforwards were as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fas2ax44x3.jpg)
aIncludes $30,368,774 as of December 31, 2010 from the reorganization with Franklin Templeton Perspectives Allocation Fund, which may be carried over to offset future capital gains, subject to certain limitations.
44 | Annual Report
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
4. INCOME TAXES (continued)
For tax purposes, realized capital losses occurring subsequent to October 31 may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2010, the Franklin Templeton Corefolio Allocation Fund and the Franklin Templeton Founding Funds Allocation Fund deferred realized capital losses of $514,325 and $44,087,210, respectively.
The tax character of distributions paid during the years ended December 31, 2010 and 2009, was as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fas2ax45x1.jpg)
At December 31, 2010, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fas2ax45x2.jpg)
Net investment income differs for financial statement and tax purposes primarily due to differing treatment of non-deductible expenses.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatment of wash sales.
Annual Report | 45
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of Underlying Funds (excluding short term securities) for the year ended December 31, 2010, were as follows:
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6. INVESTMENTS IN UNDERLYING FUNDS
The Funds invest primarily in the Underlying Funds which are managed by Franklin Advisers, Inc. (Advisers), an affiliate of FT Services, or by an affiliate of Advisers. The Funds do not invest in the Underlying Funds for the purpose of exercising a controlling influence over the management or policies.
The Funds may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Administrative fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
Investments in Underlying Funds for the year ended December 31, 2010, were as follows:
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46 | Annual Report
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
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7. SPECIAL SERVICING AGREEMENT
The Funds participate in a Special Servicing Agreement (SSA) with the Underlying Funds and certain service providers of the Funds and of the Underlying Funds. Under the SSA, each Underlying Fund may pay a portion of the Funds’ expenses (other than any asset allocation, administrative, and distribution fees) to the extent such payments are less than the amount of the benefits realized or expected to be realized by the Underlying Fund (e.g., due to reduced costs associated with servicing accounts) from the investment in the Underlying Fund by the Funds. The amount of expenses borne by the Underlying Funds during the year ended December 31, 2010 is noted in the Statements of Operations.
8. REORGANIZATION
On June 22, 2010, the Franklin Templeton Corefolio Allocation Fund, pursuant to a plan of reorganization approved on February 23, 2010 by the Board of Trustees of the Franklin Templeton Perspectives Allocation Fund (Target), acquired 100% of the Target’s net assets, primarily made up of Underlying Funds, which included $19,476,252 of unrealized depreciation, through a tax-free exchange of 18,392,565 shares of the Franklin Templeton Corefolio Allocation Fund (valued at $199,869,936). Immediately after the completion of the reorganization, the combined net assets of the Franklin Templeton Corefolio Allocation Fund were $644,869,789.
Annual Report | 47
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
8. REORGANIZATION (continued)
The primary purpose for the reorganization was to combine the Target Fund with a larger fund that has the same investment goal and substantially similar investment strategies and risks. The estimated cost of the reorganization was $127,920 of which the Franklin Templeton Corefolio Allocation Fund and the Target each paid 25% and FT Services paid 50%. The allocated portion of the Franklin Templeton Corefolio Allocation Fund’s reorganization expenses is included with other expenses in the Statement of Operations.
Assuming the reorganization had been completed on January 1, 2009, the Franklin Templeton Corefolio Allocation Fund’s pro forma results of operations would have been as follows:
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/fas2ax48x1.jpg)
Subsequent to the reorganization, the Franklin Templeton Corefolio Allocation Fund has been managed as a single entity. Accordingly, it is impracticable to identify the amounts of investment income and net investment income attributable to the Target’s assets after the completion of the reorganization.
9. CREDIT FACILITY
The Funds, together with other U.S. registered and foreign investment funds (collectively “Borrowers”), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 21, 2011. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.10% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statements of Operations. During the year ended December 31, 2010, the Funds did not use the Global Credit Facility.
Effective January 21, 2011, the Funds renewed the Global Credit Facility for a total of $750 million, maturing January 20, 2012.
48 | Annual Report
Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
10. FAIR VALUE MEASUREMENTS
The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical securities
- Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
For movements between the levels within the fair value hierarchy, the Funds have adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
At December 31, 2010, all of the Funds’ investments in Underlying Funds carried at fair value were in Level 1 inputs. For detailed Underlying Fund categories, see the accompanying Statements of Investments.
11. SUBSEQUENT EVENTS
The Funds have evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.
Annual Report | 49
Franklin Templeton Fund Allocator Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Franklin Templeton Fund Allocator Series
In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Templeton Corefolio Allocation Fund and Franklin Templeton Founding Funds Allocation Fund (separate portfolios of Franklin Templeton Fund Allocator Series, hereafter referred to as the “Funds”) at December 31, 2010, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statemen ts”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments in the Underlying Funds at December 31, 2010 by correspondence with the transfer agent of the Underlying Funds, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 14, 2011
50 | Annual Report
Franklin Templeton Fund Allocator Series
Tax Designation (unaudited)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Funds designate the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2010:
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2010:
Distributions, including qualified dividend income, paid during calendar year 2010 will be reported to shareholders on Form 1099-DIV in January 2011. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns.
Annual Report | 51
Franklin Templeton Fund Allocator Series
Board Members and Officers
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person’s successor is elected and qualified.
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56 | Annual Report
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Shareholder Information
Proxy Voting Policies and Procedures
The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
Householding of Reports and Prospectuses
You will receive each Fund’s financial reports every six months as well as an annual updated summary prospectus (prospectus available upon request). To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and summary prospectus. This process, called “householding,” will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at (800) 632-2301. At any time you may view current prospectuses/summary prospectuses and financial reports on our website. If you choose, you may receive these documents through electronic delivery.
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Annual Report and Shareholder Letter
FRANKLIN TEMPLETON
FUND ALLOCA TOR SERIES
Investment Manager
Franklin Advisers, Inc.
Distributor
Franklin Templeton Distributors, Inc.
(800) DIAL BEN®
franklintempleton. com
Shareholder Services
(800) 632-2301
Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone.
© 2011 Franklin Templeton Investments. All rights reserved.
FAS2 A 02/11
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Annual Report
Economic and Market Overview
During the 12-month period ended December 31, 2010, the U.S. economy grew unevenly, supported by a combination of fundamental business improvement and government intervention. Economic activity as measured by gross domestic product expanded at an annualized 3.7% pace in 2010’s first quarter and then downshifted to 1.7% annualized in the second quarter. Consumer spending picked up, likely due to pent-up post-recession demand, and the pace of growth rose at annualized rates of 2.6% in the third quarter and an estimated 3.2% in the fourth quarter. Globally, emerging market regions primarily led growth, as they were generally unconstrained by the debt overhang burdening western economies and benefited from strong intrinsic demand and significant capital inflows. Developed economies grew at a more subdued pace, with demand recovery and asset price reflation heavily underpinned by government-sponsored, liquid ity-enhancing measures.
In the U.S., challenges such as mixed economic data, elevated debt concerns surrounding the U.S. budget deficit and a lack of job prospects for the unemployed hindered consumer confidence and the economy’s advance. Although home prices rose early in the year, home sales stalled as a homebuyer tax credit program ended, foreclosures mounted and the housing sector remained weak. The unemployment situation showed little improvement. Even though the jobless rate fell from 10.0% in December 2009 to 9.4% at period-end, some of the decline was attributable to a shrinking labor force as many unemployed workers stopped looking for jobs.1
Amid signs of a demand-led recovery, crude oil prices rose from $79 per barrel at the end of December 2009 to $91 per barrel by the end of December 2010 largely due to accelerating global demand. The pace of inflation slowed during the year, and in December 2010 the inflation rate was an annualized 1.5%.1 Similarly, core inflation, which excludes volatile food and energy costs, slowed to a 0.8% annualized rate.1
Given few inflationary pressures and uncertainty surrounding the economic recovery, the Federal Open Market Committee (FOMC) made no major changes to its monetary policy for most of the year. The FOMC repeatedly stated it would keep the federal funds target rate within the exceptionally low 0% to 0.25% range “for an extended period” and eventually shifted its focus to its outlook and the status of its current holdings. In September, the FOMC revealed concerns about the subdued recovery and said inflation was below
1. Source: Bureau of Labor Statistics.
Annual Report | 3
the pace “consistent with its mandate.” Having already lowered interest rates effectively to zero, the FOMC announced its intention to purchase government securities to stimulate the economy and promote a low level of inflation consistent with healthy economic growth.
Investor confidence shifted with each release of encouraging or discouraging economic, regulatory and political news, stoking considerable volatility among equities. Ultimately, global stock indexes posted solid gains during the 12 months under review as investor risk aversion began to subside amid generally improving economic signs and rising consumer spending. The dollar strengthened relative to the euro, which declined as a result of the region’s fiscal crisis, but weakened against the yen, which hit multi-decade highs amid persistent deflationary pressures. Meanwhile, U.S. Treasuries and corporate bonds finished the year with gains despite Treasury price declines late in the year.
The foregoing information reflects our analysis and opinions as of December 31, 2010. 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.
4 | Annual Report
Franklin Templeton
2015 Retirement Target Fund
Your Fund’s Goal and Main Investments: Franklin Templeton 2015 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund’s asset allocation. The Fund allocates among the broad asset classes of equity, fixed income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), with an increasing emphasis on income as the target date of 2015 approaches.
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. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.
*The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund and other fund investments into a broad asset class based on its predominant investments under normal market condition s.
Below Investment Grade-0.1%
AA
This annual report for Franklin Templeton 2015 Retirement Target Fund covers the fiscal year ended December 31, 2010. BBB
A
Performance Overview
AAA
Franklin Templeton 2015 Retirement Target Fund – Class A delivered a +12.77% cumulative total return for the 12 months ended December 31, 2010. By comparison, the Fund’s equity benchmarks, the Standard & Poor’s 500 Index (S&P 500), which tracks U.S. stocks, and the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE)
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI, which begins on page 49.
Annual Report | 5
Top 10 Fund Holdings Franklin Templeton 2015 Retirement Target Fund 12/31/10 % of Total Net Assets |
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax6x1.jpg)
Index, which measures global equity performance excluding the U.S. and Canada, posted total returns of +15.06% and +8.21%.1 The Fund’s fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which tracks U.S. investment-grade bonds, posted a +6.54% total return.1 The Payden & Rygel (P&R) 90 Day U.S. T-Bill Index, a proxy for short-term investments and other net assets, had a +0.13% total return for the same period.1 You can find other performance data in the Performance Summary beginning on page 8.
Investment Strategy
When selecting equity funds, we consider the foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value) of the underlying Franklin Templeton funds and other fund investments (fund investments). When selecting fixed income funds, our primary focus is on maximizing income appropriate to the Fund’s risk profile. In evaluating the risk level of the fund investments, we analyze such factors as: (a) relative and absolute performance, including correlations with other fund investments as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Target Fund in the same fund investments and will vary the fund investments’ allocation percentages based upon each Fund’s risk/return level. We change the Fund’s target asset allocation over time, and it becomes increasingly conservative as the stated target date draws near.
Manager’s Discussion
The Fund’s performance can be attributed largely to its allocation among equities, fixed income securities, and short-term investments and other net assets, and to the actual performance of the selected fund investments. This allocation shifts every year, in accordance with the retirement date associated with the portfolio.
At period-end, Franklin Templeton 2015 Retirement Target Fund allocated 63.3% of total net assets to equity and 27.8% to fixed income. Domestic equity exposure was 69.5% of the total equity weighting, and foreign equity
1. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not sponsor, endorse, sell or promote any S&P index-based product. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
6 | Annual Report
made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2010, we held shares in large-, mid-and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund – Advisor Class, at 15.3% of the Fund’s total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 65.1% of the Fund’s total fixed income weighting, with the balance in foreign fixed income. Franklin U.S. Government Securities Fund – Advisor Class was our largest fixed income fund weighting at 10.3% of total net assets.
Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund – Advisor Class, outperformed the S&P 500, but our largest domestic value fund holding, Mutual Shares Fund – Class Z, underperformed. Our largest foreign equity fund holding, Mutual European Fund – Class Z, performed comparably to the MSCI EAFE Index, while Templeton Foreign Fund – Advisor Class outperformed. On the fixed income side, Franklin U.S. Government Securities Fund – Advisor Class underperformed the BC U.S. Aggregate Index, while Templeton Global Bond Fund – Advisor Class outperformed.
Thank you for your continued participation in Franklin Templeton 2015 Retirement Target Fund. We look forward to serving your future investment needs.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax7x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax7x2.jpg)
T. Anthony Coffey, CFA Portfolio Manager
Franklin Templeton 2015 Retirement Target Fund
CFA® is a trademark owned by CFA Institute.
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2010, 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.
Annual Report | 7
Performance Summary as of 12/31/10
Franklin Templeton 2015 Retirement Target Fund
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 and graphs do 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 any unrealized gains or losses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax8x1.jpg)
8 | Annual Report
Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class C:1% contingent deferred sales charge in first year only; Class R/Advisor Class: no sales charges.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax9x1.jpg)
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 f rom figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
The investment manager and administrator have co ntractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.15% (other than certain nonroutine expenses) until 4/30/11.
Annual Report | 9
Performance Summary (continued)
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax10x1.jpg)
10 | Annual Report
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax11x1.jpg)
Annual Report | 11
Performance Summary (continued)
Endnotes
It is important to note that the principal value of the Fund will fluctuate and is not guaranteed at any time, including at or after the stated target date for the Fund; nor is there any guarantee that the Fund will provide sufficient income, at or through the investor’s retirement. All investments involve some degree of risk. Generally, investors should be comfortable with fluctuation in the value of their investments, especially over the short term. Stocks have historically outperformed other asset classes over the long term, but they tend to fluctuate more dramatically over the shorter term. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Because the Fund invests in underlying funds, which may engage in a variety of investment strategies involving certain risks, the Fund ma y be subject to those same risks. These risks are described in the Fund’s prospectus.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax12x1.jpg)
1. If the manager and administrator had not waived fees, the Fund’s total returns would have been lower. 2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s prospectus current as of the date of this report and include the effect of acquired fund fees and expenses. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
6. Source: © 2011 Morningstar. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total U.S. equity market performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody’s, Standard & Poor’s and Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed.
12 | Annual Report
Your Fund’s Expenses
Franklin Templeton 2015 Retirement Target Fund
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Annual Report | 13
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax14x1.jpg)
*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the fund investments, net of expense waivers, annualized for each class (A: 0.45%; C: 1.15%; R: 0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month expense ratio including expenses of the fund investments, net of expense waivers, annualized for each class (A: 1.20%; C: 1.90%; R: 1.40%; and Advisor: 0.90%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
14 | Annual Report
Franklin Templeton
2025 Retirement Target Fund
Your Fund’s Goal and Main Investments: Franklin Templeton 2025 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund’s asset allocation. The Fund allocates among the broad asset classes of equity, fixed income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), with an increasing emphasis on income as the target date of 2025 approaches.
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. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.
*The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund and other fund investments into a broad asset class based on its predominant investments under normal market condition s.
Below Investment Grade-0.1%
AA
This annual report for Franklin Templeton 2025 Retirement Target Fund
covers the fiscal year ended December 31, 2010.
BBB
A
Performance Overview
AAA
Franklin Templeton 2025 Retirement Target Fund – Class A delivered a +14.14% cumulative total return for the 12 months ended December 31, 2010. By comparison, the Fund’s equity benchmarks, the Standard & Poor’s 500 Index (S&P 500), which tracks U.S. stocks, and the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE)
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI, which begins on page 54.
Annual Report | 15
Top 10 Fund Holdings Franklin Templeton 2025 Retirement Target Fund 12/31/10 % of Total Net Assets |
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax16x1.jpg)
Index, which measures global equity performance excluding the U.S. and Canada, posted total returns of +15.06% and +8.21%.1 The Fund’s fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which tracks U.S. investment-grade bonds, posted a +6.54% total return.1 The Payden & Rygel (P&R) 90 Day U.S. T-Bill Index, a proxy for short-term investments and other net assets, had a +0.13% total return for the same period.1 You can find other performance data in the Performance Summary beginning on page 18.
Investment Strategy
When selecting equity funds, we consider the foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value) of the underlying Franklin Templeton funds and other fund investments (fund investments). When selecting fixed income funds, our primary focus is on maximizing income appropriate to the Fund’s risk profile. In evaluating the risk level of the fund investments, we analyze such factors as: (a) relative and absolute performance, including correlations with other fund investments as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Target Fund in the same fund investments and will vary the fund investments’ allocation percentages based upon each Fund’s risk/return level. We change the Fund’s target asset allocation over time, and it becomes increasingly conservative as the stated target date draws near.
Manager’s Discussion
The Fund’s performance can be attributed largely to its allocation among equities, fixed income securities, and short-term investments and other net assets, and to the actual performance of the selected fund investments. This allocation shifts every year, in accordance with the retirement date associated with the portfolio.
At period-end, Franklin Templeton 2025 Retirement Target Fund allocated 76.4% of total net assets to equity and 17.5% to fixed income. Domestic equity exposure was 69.1% of the total equity weighting, and foreign equity
1. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The indexes are unmanaged and include reinvestment of any income distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
16 | Annual Report
made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2010, we held shares in large-, mid-and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund – Advisor Class, at 18.5% of the Fund’s total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 66.9% of the Fund’s total fixed income weighting, with the balance in foreign fixed income. Franklin U.S. Government Securities Fund – Advisor Class was our largest fixed income fund weighting at 6.5% of total net assets.
Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund – Advisor Class, outperformed the S&P 500, but our largest domestic value fund holding, Mutual Shares Fund – Class Z, underperformed. Our largest foreign equity fund holding, Mutual European Fund – Class Z, performed comparably to the MSCI EAFE Index, while Templeton Foreign Fund – Advisor Class outperformed. On the fixed income side, Franklin U.S. Government Securities Fund – Advisor Class underperformed the BC U.S. Aggregate Index, while Templeton Global Bond Fund – Advisor Class outperformed.
Thank you for your continued participation in Franklin Templeton 2025 Retirement Target Fund. We look forward to serving your future investment needs.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax17x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax17x2.jpg)
T. Anthony Coffey, CFA Portfolio Manager
Franklin Templeton 2025 Retirement Target Fund
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2010, 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.
Annual Report | 17
Performance Summary as of 12/31/10
Franklin Templeton 2025 Retirement Target Fund
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 and graphs do 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 any unrealized gains or losses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax18x1.jpg)
18 | Annual Report
Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only; Class R/Advisor Class: no sales charges.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax19x1.jpg)
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 f rom figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
The investment manager and administrator have co ntractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.15% (other than certain nonroutine expenses) until 4/30/11.
Annual Report | 19
Performance Summary (continued)
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax20x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax21x1.jpg)
Performance Summary (continued)
Endnotes
It is important to note that the principal value of the Fund will fluctuate and is not guaranteed at any time, including at or after the stated target date for the Fund; nor is there any guarantee that the Fund will provide sufficient income, at or through the investor’s retirement. All investments involve some degree of risk. Generally, investors should be comfortable with fluctuation in the value of their investments, especially over the short term. Stocks have historically outperformed other asset classes over the long term, but they tend to fluctuate more dramatically over the shorter term. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Because the Fund invests in underlying funds, which may engage in a variety of investment strategies involving certain risks, the Fund ma y be subject to those same risks. These risks are described in the Fund’s prospectus.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax22x1.jpg)
1. If the manager and administrator had not waived fees, the Fund’s total returns would have been lower. 2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s prospectus current as of the date of this report and include the effect of acquired fund fees and expenses. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
6. Source: © 2011 Morningstar. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total U.S. equity market performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody’s, Standard & Poor’s and Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed.
22 | Annual Report
Your Fund’s Expenses
Franklin Templeton 2025 Retirement Target Fund
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Annual Report | 23
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax24x1.jpg)
*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the fund investments, net of expense waivers, annualized for each class (A: 0.45%; C: 1.15%; R: 0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied 184/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month expense ratio including expenses of the fund investments, net of expense waivers, annualized for each class (A: 1.25%; C: 1.95%; R: 1.45%; and Advisor: 0.95%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
24 | Annual Report
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax25x1.jpg)
Top 10 Fund Holdings Franklin Templeton 2035 Retirement Target Fund 12/31/10 % of Total Net Assets |
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax26x1.jpg)
Index, which measures global equity performance excluding the U.S. and Canada, posted total returns of +15.06% and +8.21%.1 The Fund’s fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which tracks U.S. investment-grade bonds, posted a +6.54% total return.1 The Payden & Rygel (P&R) 90 Day U.S. T-Bill Index, a proxy for short-term investments and other net assets, had a +0.13% total return for the same period.1 You can find other performance data in the Performance Summary beginning on page 28.
Investment Strategy
When selecting equity funds, we consider the foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value) of the underlying Franklin Templeton funds and other fund investments (fund investments). When selecting fixed income funds, our primary focus is on maximizing income appropriate to the Fund’s risk profile. In evaluating the risk level of the fund investments, we analyze such factors as: (a) relative and absolute performance, including correlations with other fund investments as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Target Fund in the same fund investments and will vary the fund investments’ allocation percentages based upon each Fund’s risk/return level. We change the Fund’s target asset allocation over time, and it becomes increasingly conservative as the stated target date draws near.
Manager’s Discussion
The Fund’s performance can be attributed largely to its allocation among equities, fixed income securities, and short-term investments and other net assets, and to the actual performance of the selected fund investments. This allocation shifts every year, in accordance with the retirement date associated with the portfolio.
At period-end, Franklin Templeton 2035 Retirement Target Fund allocated 89.7% of total net assets to equity, and 6.2% to fixed income. Domestic equity exposure was 69.8% of the total equity weighting, and foreign equity made up the balance. The portfolio was diversified across capitalization sizes
1. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
26 | Annual Report
and investment styles, and on December 31, 2010, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund – Advisor Class, at 21.6% of the Fund’s total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 72.6% of the Fund’s total fixed income weighting.
Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund – Advisor Class, outperformed the S&P 500, but our largest domestic value fund holding, Mutual Shares Fund – Class Z, underperformed. Our largest foreign equity fund holding, Mutual European Fund – Class Z, performed comparably to the MSCI EAFE Index, while Templeton Foreign Fund –Advisor Class outperformed.
Thank you for your continued participation in Franklin Templeton 2035 Retirement Target Fund. We look forward to serving your future investment needs.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax27x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax27x2.jpg)
T. Anthony Coffey, CFA Portfolio Manager
Franklin Templeton 2035 Retirement Target Fund
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2010, 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.
Annual Report | 27
Performance Summary as of 12/31/10
Franklin Templeton 2035 Retirement Target Fund
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 and graphs do 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 any unrealized gains or losses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax28x1.jpg)
28 | Annual Report
Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only; Class R/Advisor Class: no sales charges.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax29x1.jpg)
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 f rom figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
The investment manager and administrator have co ntractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.15% (other than certain nonroutine expenses) until 4/30/11.
Annual Report | 29
Performance Summary (continued)
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax30x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax31x1.jpg)
Performance Summary (continued)
Endnotes
It is important to note that the principal value of the Fund will fluctuate and is not guaranteed at any time, including at or after the stated target date for the Fund; nor is there any guarantee that the Fund will provide sufficient income, at or through the investor’s retirement. All investments involve some degree of risk. Generally, investors should be comfortable with fluctuation in the value of their investments, especially over the short term. Stocks have historically outperformed other asset classes over the long term, but they tend to fluctuate more dramatically over the shorter term. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Because the Fund invests in underlying funds, which may engage in a variety of investment strategies involving certain risks, the Fund ma y be subject to those same risks. These risks are described in the Fund’s prospectus.
Class C: Class R: | These shares have higher annual fees and expenses than Class A shares. Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. |
Advisor Class: | Shares are available to certain eligible investors as described in the prospectus. |
1. If the manager and administrator had not waived fees, the Fund’s total returns would have been lower. 2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s prospectus current as of the date of this report and include the effect of acquired fund fees and expenses. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
6. Source: © 2011 Morningstar. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total U.S. equity market performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody’s, Standard & Poor’s and Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed.
32 | Annual Report
Your Fund’s Expenses
Franklin Templeton 2035 Retirement Target Fund
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Annual Report | 33
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax34x1.jpg)
*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the fund investments, net of expense waivers, annualized for each class (A: 0.45%; C: 1.15%; R: 0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied 184/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month expense ratio including expenses of the fund investments, net of expense waivers, annualized for each class (A: 1.30%; C: 2.00%; R: 1.50%; and Advisor: 1.00%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
34 | Annual Report
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax35x1.jpg)
Top 10 Fund Holdings Franklin Templeton 2045 Retirement Target Fund 12/31/10 % of Total Net Assets |
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax36x1.jpg)
Index, which measures global equity performance excluding the U.S. and Canada, posted total returns of +15.06% and +8.21%.1 The Fund’s fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which tracks U.S. investment-grade bonds, posted a +6.54% total return.1 The Payden & Rygel (P&R) 90 Day U.S. T-Bill Index, a proxy for short-term investments and other net assets, had a +0.13% total return for the same period.1 You can find other performance data in the Performance Summary beginning on page 38.
Investment Strategy
When selecting equity funds, we consider the foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value) of the underlying Franklin Templeton funds and other fund investments (fund investments). When selecting fixed income funds, our primary focus is on maximizing income appropriate to the Fund’s risk profile. In evaluating the risk level of the fund investments, we analyze such factors as: (a) relative and absolute performance, including correlations with other fund investments as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Target Fund in the same fund investments and will vary the fund investments’ allocation percentages based upon each Fund’s risk/return level. We change the Fund’s target asset allocation over time, and it becomes increasingly conservative as the stated target date draws near.
Manager’s Discussion
The Fund’s performance can be attributed largely to its allocation among equities and short-term investments and other net assets, and to the actual performance of the selected fund investments. This allocation shifts every year, in accordance with the retirement date associated with the portfolio.
At period-end, Franklin Templeton 2045 Retirement Target Fund allocated 96.6% of total net assets to equity. Domestic equity exposure was 69.5% of the total equity weighting, and foreign equity made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2010, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap
1. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
36 | Annual Report
Growth Fund – Advisor Class, at 22.8% of the Fund’s total net assets, was our largest equity fund weighting at period-end.
Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund – Advisor Class, outperformed the S&P 500, but our largest domestic value fund holding, Mutual Shares Fund – Class Z, underperformed. Our largest foreign equity fund holding, Mutual European Fund – Class Z, performed comparably to the MSCI EAFE Index, while Templeton Foreign Fund –Advisor Class outperformed.
Thank you for your continued participation in Franklin Templeton 2045 Retirement Target Fund. We look forward to serving your future investment needs.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax37x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax37x2.jpg)
T. Anthony Coffey, CFA Portfolio Manager
Franklin Templeton 2045 Retirement Target Fund
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2010, 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.
Annual Report | 37
Performance Summary as of 12/31/10
Franklin Templeton 2045 Retirement Target Fund
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 and graphs do 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 any unrealized gains or losses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax38x1.jpg)
38 | Annual Report
Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only; Class R/Advisor Class: no sales charges.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax39x1.jpg)
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 f rom figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
The investment manager and administrator have co ntractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.15% (other than certain nonroutine expenses) until 4/30/11.
Annual Report | 39
Performance Summary (continued)
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax40x1.jpg)
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax41x1.jpg)
Performance Summary (continued)
Endnotes
It is important to note that the principal value of the Fund will fluctuate and is not guaranteed at any time, including at or after the stated target date for the Fund; nor is there any guarantee that the Fund will provide sufficient income, at or through the investor’s retirement. All investments involve some degree of risk. Generally, investors should be comfortable with fluctuation in the value of their investments, especially over the short term. Stocks have historically outperformed other asset classes over the long term, but they tend to fluctuate more dramatically over the shorter term. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Because the Fund invests in underlying funds, which may engage in a variety of investment strategies involving certain risks, the Fund ma y be subject to those same risks. These risks are described in the Fund’s prospectus.
Class C: Class R: | These shares have higher annual fees and expenses than Class A shares. Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. |
Advisor Class: | Shares are available to certain eligible investors as described in the prospectus. |
1. If the manager and administrator had not waived fees, the Fund’s total returns would have been lower. 2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s prospectus current as of the date of this report and include the effect of acquired fund fees and expenses. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
6. Source: © 2011 Morningstar. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total U.S. equity market performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody’s, Standard & Poor’s and Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed.
42 | Annual Report
Your Fund’s Expenses
Franklin Templeton 2045 Retirement Target Fund
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Annual Report | 43
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax44x1.jpg)
*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the fund investments, net of expense waivers, annualized for each class (A: 0.45%; C: 1.15%; R: 0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month expense ratio including expenses of the fund investments, net of expense waivers, annualized for each class (A: 1.33%; C: 2.03%; R: 1.53%; and Advisor: 1.03%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
44 | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights
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Annual Report | The accompanying notes are an integral part of these financial statements. | 45
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 47
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Franklin Templeton Fund Allocator Series
Statement of Investments, December 31, 2010
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax49x1.jpg)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 49
Franklin Templeton Fund Allocator Series
Financial Highlights
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Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 51
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 53
Franklin Templeton Fund Allocator Series
Statement of Investments, December 31, 2010
![](https://capedge.com/proxy/N-CSR/0001022804-11-000006/rtfax54x1.jpg)
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54 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Highlights
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Annual Report | The accompanying notes are an integral part of these financial statements. | 55
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 57
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Franklin Templeton Fund Allocator Series
Statement of Investments, December 31, 2010
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Annual Report | The accompanying notes are an integral part of these financial statements. | 59
Franklin Templeton Fund Allocator Series
Financial Highlights
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Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 61
Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Franklin Templeton Fund Allocator Series
Financial Highlights (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 63
Franklin Templeton Fund Allocator Series
Statement of Investments, December 31, 2010
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64 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Statements
Statements of Assets and Liabilities
December 31, 2010
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Annual Report | The accompanying notes are an integral part of these financial statements. | 65
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
Statements of Assets and Liabilities (continued)
December 31, 2010
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66 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
Statements of Operations
for the year ended December 31, 2010
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Annual Report | The accompanying notes are an integral part of these financial statements. | 67
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
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68 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Fund Allocator Series
Financial Statements (continued)
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Annual Report | The accompanying notes are an integral part of these financial statements. | 69
Franklin Templeton Fund Allocator Series
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Fund Allocator Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of nine separate funds, four of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The Funds invest primarily in Franklin Templeton mutual funds (Underlying Funds). The Funds offer four classes of shares: Class A, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day. Exchange Traded Funds (ETFs) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively.
b. Income Taxes
It is each fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. Each fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. Each fund’s application of those tax rules is subject to its understanding. Each fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of December 31, 2010, and for all open tax year s, each fund has determined that no provision for income tax is required in each fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation. Each fund is not aware of any tax position for which it is reasonably possible that the total amounts of unrecognized tax effects will significantly change in the next twelve months.
c. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds and ETFs are recorded on
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Notes to Financial Statements (continued)
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
c. | Security Transactions, Investment Income, Expenses and Distributions (continued) |
the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
The Funds indirectly bear their proportionate share of expenses from the Underlying Funds and ETFs. Since the Underlying Funds and ETFs have varied expense levels and the Funds may own different proportions of the Underlying Funds and ETFs at different times, the amount of expenses incurred indirectly by the Funds will vary.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
d. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
e. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2010, there were an unlimited number of shares authorized (without par value).
Transactions in the Funds’ shares were as follows:
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Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
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Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
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3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Funds are also officers and/or directors/trustees of certain of the Underlying Funds and of the following subsidiaries:
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Notes to Financial Statements (continued)
3. | TRANSACTIONS WITH AFFILIATES (continued) |
a. | Asset Allocation Fees |
The Funds pay an asset allocation fee to Advisers of 0.25% per year of the average daily net assets of each of the Funds for investment advisory services, consisting principally of determining the allocation of assets of the Funds among the designated Underlying Funds and ETFs.
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Funds.
c. Distribution Fees
The Trust’s Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of each fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Funds’ Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of each fund’s shares up to the maximum annual plan rate for each class.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
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The Board of Trustees has set the current rate at 0.30% per year for Class A shares until further notice and approval by the Board.
d. Sales Charges/Underwriting Agreements
Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds’ shares for the year:
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Notes to Financial Statements (continued)
3. | TRANSACTIONS WITH AFFILIATES (continued) |
e. | Transfer Agent Fees |
For the year ended December 31, 2010, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
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Advisers has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Funds so that the common expenses (i.e. a combination of asset allocation fees, and other expenses, but excluding distribution fees, and acquired fund fees and expenses) for each class of the Funds do not exceed 0.15% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2011.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds’ custodian expenses. During the year ended December 31, 2010, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2010, the capital loss carryforwards were as follows:
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Notes to Financial Statements (continued)
5. INCOME TAXES (continued)
The tax character of distributions paid during the years ended December 31, 2010 and 2009, was as follows:
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At December 31, 2010, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:
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Net investment income differs for financial statement and tax purposes primarily due to differing treatment of short term capital gains distributions from Underlying Funds and ETFs.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and short term capital gains distributions from Underlying Funds and ETFs.
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Notes to Financial Statements (continued)
6. INVESTMENT TRANSACTIONS
Purchases and sales of Underlying Funds and ETFs (excluding short term securities) for the year ended December 31, 2010, were as follows:
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7. INVESTMENTS IN UNDERLYING FUNDS
The Funds invest primarily in the Underlying Funds which are managed by Advisers (or an affiliate of Advisers). The Funds do not invest in the Underlying Funds for the purpose of exercising a controlling influence over the management or policies.
The Funds may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Asset allocation fees are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
Investments in Underlying Funds for the year ended December 31, 2010, were as follows:
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Notes to Financial Statements (continued)
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Notes to Financial Statements (continued)
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Notes to Financial Statements (continued)
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8. SPECIAL SERVICING AGREEMENT
The Funds participate in a Special Servicing Agreement (SSA) with the Underlying Funds and certain service providers of the Funds and of the Underlying Funds. Under the SSA, each Underlying Fund may pay a portion of the Funds’ expenses (other than any asset allocation, administrative, and distribution fees) to the extent such payments are less than the amount of the benefits realized or expected to be realized by the Underlying Fund (e.g., due to reduced costs associated with servicing accounts) from the investment in the Underlying Fund by the Funds. The amount of expenses borne by the Underlying Funds during the year ended December 31, 2010 is noted in the Statements of Operations.
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Franklin Templeton Fund Allocator Series
Notes to Financial Statements (continued)
9. CREDIT FACILITY
The Funds, together with other U.S. registered and foreign investment funds (collectively “Borrowers”), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 21, 2011. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.10% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statements of Operations. During the year ended December 31, 2010, the Funds did not use the Global Credit Facility.
Effective January 21, 2011, the Borrowers renewed the Global Credit Facility for a total of $750 million, maturing January 20, 2012.
10. FAIR VALUE MEASUREMENTS
The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds’ own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ investments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical securities
- Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
For movements between the levels within the fair value hierarchy, the Funds have adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
At December 31, 2010, all of the Funds’ investments in Underlying Funds and ETFs carried at fair value were in Level 1 inputs. For detailed Underlying Fund and ETF categories, see the accompanying Statements of Investments.
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Notes to Financial Statements (continued)
11. SUBSEQUENT EVENTS
The Funds have evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure except those already disclosed in the financial statements.
ABBREVIATIONS
Selected Portfolio
ETF - Exchange Traded Fund
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Franklin Templeton Fund Allocator Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Franklin Templeton Fund Allocator Series
In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Franklin Templeton 2015 Retirement Target Fund, Franklin Templeton 2025 Retirement Target Fund, Franklin Templeton 2035 Retirement Target Fund and Franklin Templeton 2045 Retirement Target Fund, (separate portfolios of Franklin Templeton Fund Allocator Series, hereafter referred to as the “Funds”) at December 31, 2010, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statem ents and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments at December 31, 2010 by correspondence with the transfer agent of the Underlying Funds and custodian, provide a reasonable ba sis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 14, 2011
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Tax Designation (unaudited)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Funds designate the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2010:
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Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2010:
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Distributions, including qualified dividend income, paid during calendar year 2010 will be reported to shareholders on Form 1099-DIV in January 2011. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns.
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Franklin Templeton Fund Allocator Series
Board Members and Officers
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person’s successor is elected and qualified.
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Franklin Templeton Fund Allocator Series
Shareholder Information
Proxy Voting Policies and Procedures
The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
Householding of Reports and Prospectuses
You will receive each Fund’s financial reports every six months as well as an annual updated summary prospectus (prospectus available upon request). To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and summary prospectus. This process, called “householding,” will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at (800) 632-2301. At any time you may view current prospectuses/summary prospectuses and financial reports on our website. If you choose, you may receive these documents through electronic delivery.
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Annual Report and Shareholder Letter
FRANKLIN TEMPLETON
FUND ALLOCA TOR SERIES
Investment Manager
Franklin Advisers, Inc.
Distributor
Franklin Templeton Distributors, Inc.
(800) DIAL BEN®
franklintempleton. com
Shareholder Services
(800) 632-2301
Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone.
© 2011 Franklin Templeton Investments. All rights reserved.
RTF A 02/11
Item 2. Code of Ethics.
(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer.
Item 3. Audit Committee Financial Expert.
(a)(1) The Registrant has an audit committee financial expert serving on its audit committee.
(2) The audit committee financial expert is John B. Wilson, and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $250,381 for the fiscal year ended December 31, 2010 and $264,944 for the fiscal year ended December 31, 2009.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning.
The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $35,000 for the fiscal year ended December 31, 2010 and $2,000 for the fiscal year ended December 31, 2009. The services for which these fees were paid included technical tax consultation for capital gain tax reporting to foreign governments and derivative instruments.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $4,269 for the fiscal year ended December 31, 2010 and $0 for the fiscal year ended December 31, 2009. The services for which these fees were paid include review of materials provided to the fund Board in connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant other than services reported in paragraphs (a)-(c) of Item 4 were $140,531 for the fiscal year ended December 31, 2010 and $0 for the fiscal year ended December 31, 2009. The services for which these fees were paid include review of materials provided to the fund Board in connection with the investment management contract renewal process.
(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services:
(ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors;(iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities
Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $179,800 for the fiscal year ended December 31, 2010 and $2,000 for the fiscal year ended December 31, 2009.(h) The registrant’s audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
Item 5. Audit Committee of Listed Registrants. N/A
Item 6. Schedule of Investments. N/A
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A
Item 8. Portfolio Managers of Closed-End Management Investment Companies. N/A
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. N/A
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein.
Item 11. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principa l financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls. There have been no significant changes in the Registrant’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR.
Item 12. Exhibits.
(a)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
By /s/LAURA F. FERGERSON
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date February 25, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/LAURA F. FERGERSON
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date February 25, 2011
By /s/GASTON GARDEY
Gaston Gardey
Chief Financial Officer and Chief Accounting Officer
Date February 25, 2011