UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number_811-07851
Franklin Fund Allocator Series
(Exact name of registrant as specified in charter)
One Franklin Parkway, San Mateo, CA 94403-1906
(Address of principal executive offices) (Zip code)
Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906
(Name and address of agent for service)
Registrant's telephone number, including area code: (650) 312-2000
Date of fiscal year end: 5/31
Date of reporting period: 11/30/16
Item 1. Reports to Stockholders.
| |
| Contents | |
| |
| Semiannual Report | |
| Economic and Market Overview | 2 |
| Franklin Payout 2017 Fund | 3 |
| Franklin Payout 2018 Fund | 8 |
| Franklin Payout 2019 Fund | 13 |
| Franklin Payout 2020 Fund | 18 |
| Franklin Payout 2021 Fund | 23 |
| Financial Highlights and Statements of Investments | 28 |
| Financial Statements | 51 |
| Notes to Financial Statements | 58 |
| Shareholder Information | 66 |
Not FDIC Insured | May Lose Value | No Bank Guarantee
1
Semiannual Report
Economic and Market Overview
The U.S. economy strengthened during the six months under review. The economy grew at a faster pace in 2016’s third quarter than in the second quarter, mainly due to personal consumption expenditures, exports, private inventory investment, federal government spending and nonresidential fixed investment. Manufacturing conditions remained volatile but generally expanded, and the services sector continued to grow. The unemployment rate declined from 4.7% in May to 4.6% at period-end.1 Monthly retail sales were volatile, but grew during most of the review period. Inflation, as measured by the Consumer Price Index, remained relatively subdued for most of the period, but rose during the second half.
The U.S. Federal Reserve (Fed) kept its target interest rate at 0.25–0.50% at its November meeting, while setting the stage for an interest rate hike in December. The Fed members generally agreed that it would be appropriate to raise the federal funds rate in the near term, as long as data continue to provide evidence of economic resilience.
The 10-year Treasury yield, which moves inversely to price, shifted throughout the period. It rose from 1.84% on May 31, 2016, to a period high of 2.37% on Nov 30, 2016. However, negative interest rates in Japan and Europe and central banks’ purchases of government bonds pushed down the Treasury yield. The U.K.’s historic referendum to leave the European Union in June 2016 (also known as “Brexit”) also boosted safe haven buying by investors. The Treasury yield reached a period low of 1.37% in early July. The yield rose in October, due to positive economic data and signals from the Fed on the possibility of an increase in interest rates in the near term. Additionally, in November, the U.S. Treasury yield further increased, amid a bond market selloff, based on investor expectations that possible expansionary fiscal policies under the new U.S. President Donald Trump could lead to a stronger economy and higher inflation.
The foregoing information reflects our analysis and opinions as of November 30, 2016. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
1. Source: Bureau of Labor Statistics.
2 Semiannual Report
Franklin Payout 2017 Fund
We are pleased to bring you Franklin Payout 2017 Fund’s semiannual report for the period ended November 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital preservation and income with a predetermined maturity date. Under normal market conditions, the Fund invests predominantly in U.S. investment-grade debt securities and investments, including government and corporate debt securities and asset-backed securities and municipal securities.
Performance Overview
The Fund’s Advisor Class shares delivered a +0.60% cumulative total return for the six months under review. In comparison, the Fund’s benchmark, the Bloomberg Barclays U.S. Government/Credit 2017 Maturity Index, returned +0.40%.1 The index includes investment-grade, U.S. dollar-denominated, fixed-rate Treasuries, government-related and corporate securities and foreign debt maturing in 2017. You can find more of the Fund’s performance data in the Performance Summary beginning on page 5.
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
Investment Strategy
We focus on investment-grade securities and investments or in unrated securities and investments we determine are of comparable quality. Our focus on the portfolio’s credit quality is intended to reduce credit risk and help to preserve capital. We may invest a portion of the Fund’s assets in U.S. dollar-denominated foreign securities, including debt issued by supranational entities. In choosing investments, we select securities in various market sectors based on our assessment of changing economic, market, industry and issuer conditions. We use a top-down analysis of broad economic trends, combined with a bottom-up fundamental analysis of market sectors, industries and issuers, to try to take advantage of varying sector reactions to economic events.
Although the Fund may invest in individual securities of any maturity, the Fund is a term fund and is managed to mature in 2017. Over time, the Fund’s duration and weighted average maturity will decline as 2017 approaches. In the later months of operation, when the debt securities held by the Fund mature, the proceeds from such securities will be held in cash, cash equivalents and money market instruments, including affiliated money market funds, or invested in short-term bonds. In early December 2017, the Fund is expected to consist almost entirely of cash, cash equivalents and money market instruments. The Fund is designed for investors who seek an investment with a payout schedule to help meet their retirement spending needs, particularly those who are nearing retirement or are in retirement. There is no guarantee the Fund will meet an investor’s retirement spending needs.
What is duration?
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
Manager’s Discussion
During the period under review, the Fund’s performance relative to the Bloomberg Barclays U.S. Government/Credit 2017 Maturity Index was enhanced primarily by our overweighted allocation to the investment-grade corporate credit sector, with security selection within the sector slightly benefiting results. In addition, our modestly longer duration
1. Source: FactSet.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 30.
Semiannual Report 3
| | |
| FRANKLIN PAYOUT 2017 FUND | | |
| |
| |
| |
| Maturity | | |
| 11/30/16 | | |
| | % of Total | |
| | Market Value | |
| 0 to 1 Year | 47.4 | % |
| 1 to 2 Years | 49.8 | % |
| 3 to 4 Years | 2.8 | % |
| |
| Top 10 Holdings* | | |
| 11/30/16 | | |
| | % of Total | |
| Issue/Issuer | Net Assets | |
| Federal Home Loan Bank (FHLB) | 8.7 | % |
| Federal National Mortgage Association (FNMA) | 4.9 | % |
| Morgan Stanley | 3.0 | % |
| Pacific Gas & Electric Co. | 2.9 | % |
| Wells Fargo & Co. | 2.9 | % |
| General Electric Co. | 2.9 | % |
| The Bear Stearns Cos. LLC | 2.9 | % |
| Bank of America Corp. | 2.9 | % |
| The Goldman Sachs Group Inc. | 2.9 | % |
| EOG Resources Inc. | 2.9 | % |
*Securities are listed by issuer, which may appear by another name in the SOI.
positioning compared with the index and security selection within our foreign holdings aided relative performance. In contrast, security selection in the U.S. agency sector detracted slightly from results.
At period-end, we remained focused on investment-grade corporate credit exposures in the portfolio and maintained an overweighting in the sector compared with the benchmark. We favored the sector based on our belief that its overall valuations remained relatively attractive on a longer term basis and the sector offered relatively higher earnings potential. Conversely, we maintained an underweighted allocation to the U.S. Treasury sector as valuations and income levels remained unattractive to us. Additionally, we maintained an overweighted position in the agency sector. Finally, we maintained a modestly longer duration in the portfolio compared with the index, driven largely by our focus on bonds with final maturity dates closer to the Fund’s predetermined maturity date.
Thank you for your participation in Franklin Payout 2017 Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
4 Semiannual Report
FRANKLIN PAYOUT 2017 FUND
Performance Summary as of November 30, 2016
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Performance as of 11/30/161
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum and minimum is 0%. Advisor Class: no sales charges. For other share classes, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
| | | | |
| | Cumulative | | Average Annual | |
| Share Class | Total Return2 | | Total Return3 | |
| Advisor | | | | |
| 6-Month | +0.60 | % | +0.60 | % |
| 1-Year | +1.50 | % | +1.50 | % |
| Since Inception (6/1/15) | +1.71 | % | +1.14 | % |
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
See page 6 for Performance Summary footnotes.
Semiannual Report 5
| | | | |
| FRANKLIN PAYOUT 2017 FUND | | | | |
| PERFORMANCE SUMMARY | | | | |
| |
| Total Annual Operating Expenses4 | | | |
| Share Class | With Waiver | | Without Waiver | |
| Advisor | 0.44 | % | 4.25 | % |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its
value. Interest rate movements will affect the Fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. As the prices of
bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Because the Fund can only distribute what it earns, the Fund’s
distributions to shareholders may decline when prevailing interest rates fall or when the Fund experiences defaults on debt securities it holds. Interest earned on
floating rate loans varies with changes in prevailing interest rates. Therefore, while floating rate loans offer higher interest income when interest rates rise, they
will also generate less income when interest rates decline. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will
achieve the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has an expense reduction contractually guaranteed through 9/30/17. The Fund also has a fee waiver associated with any investments it makes in a Franklin
Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through its current fiscal year-end. Fund investment results reflect the expense reduction
and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the period indicated.
3. Average annual total return represents the change in value of an investment over the period indicated. Return for less than one year, if any, has not been annualized.
4. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this
report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
FRANKLIN PAYOUT 2017 FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions, if applicable; and (2) 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 table below 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 table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. 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): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
| | | | | | | | | | | | |
| | | | | | | Actual | | Hypothetical | | |
| | | | | (actual return after expenses) | | (5% annual return before expenses) | | |
| |
| | | | | | | Expenses | | | | Expenses | Net | |
| | | Beginning | | Ending | | Paid During | | Ending | | Paid During | Annualized | |
| Share | | Account | | Account | | Period | | Account | | Period | Expense | |
| Class | | Value 6/1/16 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | Ratio2 | |
| |
| R6 | $ | 1,000 | $ | 1,006.00 | $ | 1.46 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
| Advisor | $ | 1,000 | $ | 1,006.00 | $ | 1.46 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above–in the far right column–multiplied by the simple average account value
over the period indicated, and then multiplied by 183/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
Semiannual Report 7
Franklin Payout 2018 Fund
We are pleased to bring you Franklin Payout 2018 Fund’s semiannual report for the period ended November 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital preservation and income with a predetermined maturity date. Under normal market conditions, the Fund invests predominantly in U.S. investment-grade debt securities and investments, including government and corporate debt securities and asset-backed securities and municipal securities.
Performance Overview
The Fund’s Advisor Class shares delivered a +0.50% cumulative total return for the six months under review. In comparison, the Fund’s benchmark, the Bloomberg Barclays U.S. Government/Credit 2018 Maturity Index, returned +0.37%.1 The index includes investment-grade, U.S. dollar-denominated, fixed-rate Treasuries, government-related and corporate securities and foreign debt maturing in 2018. You can find more of the Fund’s performance data in the Performance Summary beginning on page 10.
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
Investment Strategy
We focus on investment-grade securities and investments or in unrated securities and investments we determine are of comparable quality. Our focus on the portfolio’s credit quality is intended to reduce credit risk and help to preserve capital. We may invest a portion of the Fund’s assets in U.S. dollar-denominated foreign securities, including debt issued by supranational entities. In choosing investments, we select securities in various market sectors based on our assessment of changing economic, market, industry and issuer conditions. We use a top-down analysis of broad economic trends, combined with a bottom-up fundamental analysis of market sectors,
industries and issuers, to try to take advantage of varying sector reactions to economic events.
Although the Fund may invest in individual securities of any maturity, the Fund is a term fund and is managed to mature in 2018. Over time, the Fund’s duration and weighted average maturity will decline as 2018 approaches. In the later months of operation, when the debt securities held by the Fund mature, the proceeds from such securities will be held in cash, cash equivalents and money market instruments, including affiliated money market funds, or invested in short-term bonds. In early December 2018, the Fund is expected to consist almost entirely of cash, cash equivalents and money market instruments. The Fund is designed for investors who seek an investment with a payout schedule to help meet their retirement spending needs, particularly those who are nearing retirement or are in retirement. There is no guarantee the Fund will meet an investor’s retirement spending needs.
What is duration?
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
| | |
| Maturity | | |
| 11/30/16 | | |
| | % of Total | |
| | Market Value | |
| 0 to 1 Year | 2.9 | % |
| 1 to 2 Years | 56.9 | % |
| 2 to 3 Years | 40.2 | % |
1. Source: FactSet.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 35.
8 Semiannual Report
FRANKLIN PAYOUT 2018 FUND
| | |
| Top 10 Holdings* | | |
| 11/30/16 | | |
| | % of Total | |
| Issue/Issuer | Net Assets | |
| U.S. Treasury Note | 8.6 | % |
| Federal National Mortgage Association (FNMA) | 4.9 | % |
| Federal Home Loan Bank (FHLB) | 3.7 | % |
| Caterpillar Inc. | 3.1 | % |
| Pacific Gas & Electric Co. | 3.1 | % |
| Duke Energy Carolinas LLC | 3.1 | % |
| Raytheon Co. | 3.1 | % |
| Bank of America Corp. | 3.1 | % |
| HSBC USA Inc. | 2.8 | % |
| Citigroup Inc. | 2.8 | % |
*Securities are listed by issuer, which may appear by another name in the SOI.
Manager’s Discussion
During the period under review, the Fund’s performance relative to the Bloomberg Barclays U.S. Government/Credit 2018 Maturity Index was enhanced primarily by our overweighted allocation to the investment-grade corporate credit sector, with security selection within the sector also benefiting results. In addition, security selection within our foreign holdings aided performance. In contrast, our longer duration positioning compared with the index was the primary detractor from relative performance.
At period-end, we remained focused on investment-grade corporate credit exposures in the portfolio and maintained an overweighting in the sector compared with the index. We favored the sector based on our belief that its overall valuations remained relatively attractive on a longer term basis and the sector offered relatively higher earnings potential. Conversely, we maintained an underweighted allocation to the U.S. Treasury sector as valuations and income levels remained unattractive to us. Additionally, we maintained a slightly underweighted position in the agency sector. Finally, we maintained a modestly longer duration in the portfolio compared with the index, driven largely by our focus on bonds with final maturity dates closer to the Fund’s predetermined maturity date.
Thank you for your participation in Franklin Payout 2018 Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
Semiannual Report 9
FRANKLIN PAYOUT 2018 FUND
Performance Summary as of November 30, 2016
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Performance as of 11/30/161
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum and minimum is 0%. Advisor Class: no sales charges. For other share classes, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
| | | | |
| | Cumulative | | Average Annual | |
| Share Class | Total Return2 | | Total Return3 | |
| Advisor | | | | |
| 6-Month | +0.50 | % | +0.50 | % |
| 1-Year | +1.88 | % | +1.88 | % |
| Since Inception (6/1/15) | +2.28 | % | +1.52 | % |
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
See page 11 for Performance Summary footnotes.
| | | | | |
| | | | | | FRANKLIN PAYOUT 2018 FUND |
| | | | | | PERFORMANCE SUMMARY |
| |
| Total Annual Operating Expenses4 | | | | |
| Share Class | With Waiver | | Without Waiver | | |
| Advisor | 0.44 | % | 4.17 | % | |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its
value. Interest rate movements will affect the Fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. As the prices of
bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Because the Fund can only distribute what it earns, the Fund’s
distributions to shareholders may decline when prevailing interest rates fall or when the Fund experiences defaults on debt securities it holds. Interest earned on
floating rate loans varies with changes in prevailing interest rates. Therefore, while floating rate loans offer higher interest income when interest rates rise, they
will also generate less income when interest rates decline. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will
achieve the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has an expense reduction contractually guaranteed through 9/30/17. The Fund also has a fee waiver associated with any investments it makes in a Franklin
Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through its current fiscal year-end. Fund investment results reflect the expense reduction
and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the period indicated.
3. Average annual total return represents the change in value of an investment over the period indicated. Return for less than one year, if any, has not been annualized.
4. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this
report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
Semiannual Report 11
FRANKLIN PAYOUT 2018 FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions, if applicable; and (2) 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 table below 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 table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. 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): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
| | | | | | | | | | | | |
| | | | | | | Actual | | Hypothetical | | |
| | | | | (actual return after expenses) | | (5% annual return before expenses) | | |
| |
| | | | | | | Expenses | | | | Expenses | Net | |
| | | Beginning | | Ending | | Paid During | | Ending | | Paid During | Annualized | |
| Share | | Account | | Account | | Period | | Account | | Period | Expense | |
| Class | | Value 6/1/16 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | Ratio2 | |
| |
| R6 | $ | 1,000 | $ | 1,005.00 | $ | 1.46 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
| Advisor | $ | 1,000 | $ | 1,005.00 | $ | 1.46 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above–in the far right column–multiplied by the simple average account value
over the period indicated, and then multiplied by 183/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
Franklin Payout 2019 Fund
We are pleased to bring you Franklin Payout 2019 Fund’s semiannual report for the period ended November 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital preservation and income with a predetermined maturity date. Under normal market conditions, the Fund invests predominantly in U.S. investment-grade debt securities and investments, including government and corporate debt securities and asset-backed securities and municipal securities.
Performance Overview
The Fund’s Advisor Class shares delivered a +0.39% cumulative total return for the six months under review. In comparison, the Fund’s benchmark, the Bloomberg Barclays U.S. Government/Credit 2019 Maturity Index, returned +0.14%.1 The index includes investment-grade, U.S. dollar-denominated, fixed-rate Treasuries, government-related and corporate securities and foreign debt maturing in 2019. You can find more of the Fund’s performance data in the Performance Summary beginning on page 15.
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
Investment Strategy
We focus on investment-grade securities and investments or in unrated securities and investments we determine are of comparable quality. Our focus on the portfolio’s credit quality is intended to reduce credit risk and help to preserve capital. We may invest a portion of the Fund’s assets in U.S. dollar-denominated foreign securities, including debt issued by supranational entities. In choosing investments, we select securities in various market sectors based on our assessment of changing economic, market, industry and issuer conditions. We use a top-down analysis of broad economic trends, combined with a bottom-up fundamental analysis of market sectors,
industries and issuers, to try to take advantage of varying sector reactions to economic events.
Although the Fund may invest in individual securities of any maturity, the Fund is a term fund and is managed to mature in 2019. Over time, the Fund’s duration and weighted average maturity will decline as 2019 approaches. In the later months of operation, when the debt securities held by the Fund mature, the proceeds from such securities will be held in cash, cash equivalents and money market instruments, including affiliated money market funds, or invested in short-term bonds. In early December 2019, the Fund is expected to consist almost entirely of cash, cash equivalents and money market instruments. The Fund is designed for investors who seek an investment with a payout schedule to help meet their retirement spending needs, particularly those who are nearing retirement or are in retirement. There is no guarantee the Fund will meet an investor’s retirement spending needs.
What is duration?
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
| | |
| Maturity | | |
| 11/30/16 | | |
| | % of Total | |
| | Market Value | |
| 0 to 1 Year | 2.5 | % |
| 2 to 3 Years | 59.7 | % |
| 3 to 4 Years | 37.8 | % |
1. Source: FactSet.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 39.
Semiannual Report 13
| | |
| FRANKLIN PAYOUT 2019 FUND | | |
| |
| |
| |
| Top 10 Holdings* | | |
| 11/30/16 | | |
| | % of Total | |
| Issue/Issuer | Net Assets | |
| Federal Home Loan Bank (FHLB) | 9.0 | % |
| Federal National Mortgage Association (FNMA) | 4.9 | % |
| Federal Farm Credit Bank (FFCB) | 3.7 | % |
| Anheuser-Busch InBev Worldwide Inc. | 2.8 | % |
| Morgan Stanley | 2.6 | % |
| Emerson Electric Co. | 2.6 | % |
| Boeing Capital Corp. | 2.6 | % |
| Westpac Banking Corp. | 2.6 | % |
| Deere & Co. | 2.6 | % |
| Lockheed Martin Corp. | 2.6 | % |
*Securities are listed by issuer, which may appear by another name in the SOI.
Manager’s Discussion
During the period under review, the Fund’s performance relative to the Bloomberg Barclays U.S. Government/Credit 2019 Maturity Index was enhanced primarily by our overweighted allocations to the high yield and investment-grade corporate credit sectors, although security selection within the investment-grade corporate credit sector detracted from returns. In addition, security selection within the high yield corporate credit sector contributed to performance, and allocation and security selection in the U.S. agency sector contributed slightly. In contrast, our longer duration positioning compared with the index was the primary detractor from relative performance. Our foreign exposure weighed slightly on returns, although security selection within our foreign positions helped slightly.
At period-end, we remained focused on investment-grade corporate credit exposures in the portfolio and maintained an overweighting in the sector compared with the index. We favored the sector based on our belief that its overall valuations remained relatively attractive on a longer term basis and the sector offered relatively higher earnings potential. Conversely, we maintained an underweighted allocation to the U.S. Treasury sector as valuations and income levels remained unattractive to us. Additionally, we maintained an overweighted position in the agency sector. Finally, we maintained a modestly longer duration in the portfolio compared with the index, driven largely by our focus on bonds with final maturity dates closer to the Fund’s predetermined maturity date.
Thank you for your participation in Franklin Payout 2019 Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
FRANKLIN PAYOUT 2019 FUND
Performance Summary as of November 30, 2016
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Performance as of 11/30/161
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum and minimum is 0%. Advisor Class: no sales charges. For other share classes, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
| | | | |
| | Cumulative | | Average Annual | |
| Share Class | Total Return2 | | Total Return3 | |
| Advisor | | | | |
| 6-Month | +0.39 | % | +0.39 | % |
| 1-Year | +2.64 | % | +2.64 | % |
| Since Inception (6/1/15) | +3.26 | % | +2.16 | % |
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
See page 16 for Performance Summary footnotes.
Semiannual Report 15
| | | | |
| FRANKLIN PAYOUT 2019 FUND | | | | |
| PERFORMANCE SUMMARY | | | | |
| |
| Total Annual Operating Expenses4 | | | |
| Share Class | With Waiver | | Without Waiver | |
| Advisor | 0.44 | % | 3.71 | % |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its
value. Interest rate movements will affect the Fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. As the prices of
bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Because the Fund can only distribute what it earns, the Fund’s
distributions to shareholders may decline when prevailing interest rates fall or when the Fund experiences defaults on debt securities it holds. Interest earned on
floating rate loans varies with changes in prevailing interest rates. Therefore, while floating rate loans offer higher interest income when interest rates rise, they
will also generate less income when interest rates decline. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will
achieve the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has an expense reduction contractually guaranteed through 9/30/17. The Fund also has a fee waiver associated with any investments it makes in a Franklin
Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through its current fiscal year-end. Fund investment results reflect the expense reduction
and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the period indicated.
3. Average annual total return represents the change in value of an investment over the period indicated. Return for less than one year, if any, has not been annualized.
4. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this
report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
FRANKLIN PAYOUT 2019 FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions, if applicable; and (2) 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 table below 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 table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. 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): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
| | | | | | | | | | | | |
| | | | | | | Actual | | Hypothetical | | |
| | | | | (actual return after expenses) | | (5% annual return before expenses) | | |
| |
| | | | | | | Expenses | | | | Expenses | Net | |
| | | Beginning | | Ending | | Paid During | | Ending | | Paid During | Annualized | |
| Share | | Account | | Account | | Period | | Account | | Period | Expense | |
| Class | | Value 6/1/16 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | Ratio2 | |
| |
| R6 | $ | 1,000 | $ | 1,003.90 | $ | 1.46 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
| Advisor | $ | 1,000 | $ | 1,003.90 | $ | 1.46 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above–in the far right column–multiplied by the simple average account value
over the period indicated, and then multiplied by 183/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
Semiannual Report 17
Franklin Payout 2020 Fund
This semiannual report for Franklin Payout 2020 Fund covers the period ended November 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital preservation and income with a predetermined maturity date. Under normal market conditions, the Fund invests predominantly in U.S. investment-grade debt securities and investments, including government and corporate debt securities and asset-backed securities and municipal securities.
Performance Overview
The Fund’s Advisor Class shares delivered a 0.00% cumulative total return for the six months under review. In comparison, the Fund’s benchmark, the Bloomberg Barclays U.S. Government/Credit 2020 Maturity Index, returned -0.21%.1 The index includes investment-grade, U.S. dollar-denominated, fixed-rate Treasuries, government-related and corporate securities and foreign debt maturing in 2020. You can find more of the Fund’s performance data in the Performance Summary beginning on page 20.
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
Investment Strategy
We focus on investment-grade securities and investments or in unrated securities and investments we determine are of comparable quality. Our focus on the portfolio’s credit quality is intended to reduce credit risk and help to preserve capital. We may invest a portion of the Fund’s assets in U.S. dollar-denominated foreign securities, including debt issued by supranational entities. In choosing investments, we select securities in various market sectors based on our assessment of changing economic, market, industry and issuer conditions. We use a top-down analysis of broad economic trends, combined with a bottom-up fundamental analysis of market sectors,
industries and issuers, to try to take advantage of varying sector reactions to economic events.
Although the Fund may invest in individual securities of any maturity, the Fund is a term fund and is managed to mature in 2020. Over time, the Fund’s duration and weighted average maturity will decline as 2020 approaches. In the later months of operation, when the debt securities held by the Fund mature, the proceeds from such securities will be held in cash, cash equivalents and money market instruments, including affiliated money market funds, or invested in short-term bonds. In early December 2020, the Fund is expected to consist almost entirely of cash, cash equivalents and money market instruments. The Fund is designed for investors who seek an investment with a payout schedule to help meet their retirement spending needs, particularly those who are nearing retirement or are in retirement. There is no guarantee the Fund will meet an investor’s retirement spending needs.
What is duration?
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
Manager’s Discussion
During the period under review, the Fund’s performance relative to the Bloomberg Barclays U.S. Government/Credit 2020 Maturity Index was enhanced primarily by our overweighted allocations to the high yield and investment-grade corporate credit sectors, with security selection within the
1. Source: FactSet.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 43.
FRANKLIN PAYOUT 2020 FUND
| | |
| Maturity | | |
| 11/30/16 | | |
| | % of Total | |
| | Market Value | |
| 0 to 1 Year | 2.3 | % |
| 3 to 4 Years | 75.5 | % |
| 4 to 5 Years | 22.2 | % |
| |
| Top 10 Holdings* | | |
| 11/30/16 | | |
| | % of Total | |
| Issue/Issuer | Net Assets | |
| U.S. Treasury Note | 12.3 | % |
| Federal Home Loan Bank (FHLB) | 5.1 | % |
| AEGON Funding Co. LLC | 2.7 | % |
| Morgan Stanley | 2.7 | % |
| Emerson Electric Co. | 2.6 | % |
| Hershey Co. | 2.6 | % |
| JPMorgan Chase & Co. | 2.6 | % |
| Travelers Cos. Inc. | 2.6 | % |
| UnitedHealth Group Inc. | 2.6 | % |
| Aetna Inc. | 2.5 | % |
*Securities are listed by issuer, which may appear by another name in the SOI.
high yield corporate credit sector also helping results. However, security selection within the investment-grade corporate credit sector weighed on returns. Security selection within our foreign holdings contributed to performance, although this positive effect was partially offset by the negative effect of sector allocation. In contrast, our longer duration positioning compared with the index was the primary detractor from relative performance. Security selection in the U.S. agency sector weighed slightly on performance over the period.
At period-end, we remained focused on investment-grade corporate credit exposures in the portfolio and maintained an overweighting in the sector compared with the index. We favored the sector based on our belief that valuations remained relatively attractive on a longer term basis and the sector offered higher earnings potential. Conversely, we maintained an underweighted allocation to the U.S. Treasury sector as valuations and income levels remained unattractive to us. Additionally, we maintained an overweighted position in the agency sector. Finally, we maintained a modestly longer duration in the portfolio compared with the index, driven largely by our focus on bonds with final maturity dates closer to the Fund’s predetermined maturity date.
Thank you for your participation in Franklin Payout 2020 Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
Semiannual Report 19
FRANKLIN PAYOUT 2020 FUND
Performance Summary as of November 30, 2016
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Performance as of 11/30/161
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum and minimum is 0%. Advisor Class: no sales charges. For other share classes, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
| | | | |
| | Cumulative | | Average Annual | |
| Share Class | Total Return2 | | Total Return3 | |
| Advisor | | | | |
| 6-Month | 0.00 | % | 0.00 | % |
| 1-Year | +2.69 | % | +2.69 | % |
| Since Inception (6/1/15) | +3.10 | % | +2.06 | % |
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
See page 21 for Performance Summary footnotes.
| | | | | |
| | | | | | FRANKLIN PAYOUT 2020 FUND |
| | | | | | PERFORMANCE SUMMARY |
| |
| Total Annual Operating Expenses4 | | | | |
| Share Class | With Waiver | | Without Waiver | | |
| Advisor | 0.44 | % | 3.73 | % | |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its
value. Interest rate movements will affect the Fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. As the prices of
bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Because the Fund can only distribute what it earns, the Fund’s
distributions to shareholders may decline when prevailing interest rates fall or when the Fund experiences defaults on debt securities it holds. Interest earned on
floating rate loans varies with changes in prevailing interest rates. Therefore, while floating rate loans offer higher interest income when interest rates rise, they
will also generate less income when interest rates decline. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will
achieve the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has an expense reduction contractually guaranteed through 9/30/17. The Fund also has a fee waiver associated with any investments it makes in a Franklin
Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through its current fiscal year-end. Fund investment results reflect the expense reduction
and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the period indicated.
3. Average annual total return represents the change in value of an investment over the period indicated. Return for less than one year, if any, has not been annualized.
4. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this
report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
Semiannual Report 21
FRANKLIN PAYOUT 2020 FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions, if applicable; and (2) 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 table below 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 table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. 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): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
| | | | | | | | | | | | |
| | | | | | | Actual | | Hypothetical | | |
| | | | | (actual return after expenses) | | (5% annual return before expenses) | | |
| |
| | | | | | | Expenses | | | | Expenses | Net | |
| | | Beginning | | Ending | | Paid During | | Ending | | Paid During | Annualized | |
| Share | | Account | | Account | | Period | | Account | | Period | Expense | |
| Class | | Value 6/1/16 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | Ratio2 | |
| |
| R6 | $ | 1,000 | $ | 1,000.00 | $ | 1.45 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
| Advisor | $ | 1,000 | $ | 1,000.00 | $ | 1.45 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above–in the far right column–multiplied by the simple average account value
over the period indicated, and then multiplied by 183/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
Franklin Payout 2021 Fund
This semiannual report for Franklin Payout 2021 Fund covers the period ended November 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital preservation and income with a predetermined maturity date. Under normal market conditions, the Fund invests predominantly in U.S. investment-grade debt securities and investments, including government and corporate debt securities and asset-backed securities and municipal securities.
Performance Overview
The Fund’s Advisor Class shares delivered a -0.49% cumulative total return for the six months under review. In comparison, the Fund’s benchmark, the Bloomberg Barclays U.S. Government/Credit 2021 Maturity Index, returned -0.62%.1 The index includes investment-grade, U.S. dollar-denominated, fixed-rate Treasuries, government-related and corporate securities and foreign debt maturing in 2021.You can find more of the Fund’s performance data in the Performance Summary beginning on page 25.
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
Investment Strategy
We focus on investment-grade securities and investments or in unrated securities and investments we determine are of comparable quality. Our focus on the portfolio’s credit quality is intended to reduce credit risk and help to preserve capital. We may invest a portion of the Fund’s assets in U.S. dollar-denominated foreign securities, including debt issued by supranational entities. In choosing investments, we select securities in various market sectors based on our assessment of changing economic, market, industry and issuer conditions. We use a top-down analysis of broad economic trends, combined with a bottom-up fundamental analysis of market sectors,
industries and issuers, to try to take advantage of varying sector reactions to economic events.
Although the Fund may invest in individual securities of any maturity, the Fund is a term fund and is managed to mature in 2021. Over time, the Fund’s duration and weighted average maturity will decline as 2021 approaches. In the later months of operation, when the debt securities held by the Fund mature, the proceeds from such securities will be held in cash, cash equivalents and money market instruments, including affiliated money market funds, or invested in short-term bonds. In early December 2021, the Fund is expected to consist almost entirely of cash, cash equivalents and money market instruments. The Fund is designed for investors who seek an investment with a payout schedule to help meet their retirement spending needs, particularly those who are nearing retirement or are in retirement. There is no guarantee the Fund will meet an investor’s retirement spending needs.
What is duration?
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
Manager’s Discussion
During the period under review, the Fund’s performance relative to the Bloomberg Barclays U.S. Government/Credit
1. Source: FactSet.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 48.
Semiannual Report 23
| | |
| FRANKLIN PAYOUT 2021 FUND | | |
| |
| |
| |
| Maturity | | |
| 11/30/16 | | |
| | % of Total | |
| | Market Value | |
| 0 to 1 Year | 2.7 | % |
| 4 to 5 Years | 63.0 | % |
| 5 to 6 Years | 34.3 | % |
| |
| Top 10 Holdings* | | |
| 11/30/16 | | |
| | % of Total | |
| Issue/Issuer | Net Assets | |
| U.S. Treasury Note | 7.7 | % |
| Federal Home Loan Bank (FHLB) | 5.0 | % |
| Federal Farm Credit Bank (FFCB) | 4.8 | % |
| California State General Obligation (GO) | 2.8 | % |
| Thomas & Betts Corp. | 2.7 | % |
| General Electric Co. | 2.6 | % |
| Telstra Corp. Ltd. | 2.6 | % |
| Gilead Sciences Inc. | 2.6 | % |
| Total Capital SA | 2.6 | % |
| Simon Property Group LP | 2.6 | % |
*Securities are listed by issuer, which may appear by another name in the SOI.
2021 Maturity Index was enhanced primarily by our overweighted allocations to the investment-grade and high yield corporate credit sectors, although security selection within the investment-grade corporate credit sector weighed on performance. Our allocations to the U.S. agency and municipal bond sectors also aided performance, but security selection within both sectors detracted. Security selection within our foreign holdings contributed to performance, but our allocation to the sector detracted slightly. In contrast, our longer duration positioning compared with the index was the primary detractor from relative performance over the period.
At period-end, we remained focused on investment-grade corporate credit exposures in the portfolio and maintained an overweighting in the sector compared with the index. We favored the sector based on our belief that overall valuations remained relatively attractive on a longer term basis and the sector offered higher earnings potential. Conversely, we maintained an underweighted allocation to the U.S. Treasury sector as valuations and income levels remained unattractive to us. Additionally, we maintained an overweighted position in the agency sector. Finally, we maintained a modestly longer duration in the portfolio compared with the index, driven largely by our focus on bonds with final maturity dates closer to the Fund’s predetermined maturity date.
Thank you for your participation in Franklin Payout 2021 Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
FRANKLIN PAYOUT 2021 FUND
Performance Summary as of November 30, 2016
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Performance as of 11/30/161
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum and minimum is 0%. Advisor Class: no sales charges. For other share classes, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
| | | | |
| | Cumulative | | Average Annual | |
| Share Class | Total Return2 | | Total Return3 | |
| Advisor | | | | |
| 6-Month | -0.49 | % | -0.49 | % |
| 1-Year | +3.11 | % | +3.11 | % |
| Since Inception (6/1/15) | +4.04 | % | +2.68 | % |
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, call a Franklin Templeton Institutional Services representative at (800) 321-8563.
See page 26 for Performance Summary footnotes.
Semiannual Report 25
| | | | |
| FRANKLIN PAYOUT 2021 FUND | | | | |
| PERFORMANCE SUMMARY | | | | |
| |
| Total Annual Operating Expenses4 | | | |
| Share Class | With Waiver | | Without Waiver | |
| Advisor | 0.44 | % | 3.70 | % |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its
value. Interest rate movements will affect the Fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. As the prices of
bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Because the Fund can only distribute what it earns, the Fund’s
distributions to shareholders may decline when prevailing interest rates fall or when the Fund experiences defaults on debt securities it holds. Interest earned on
floating rate loans varies with changes in prevailing interest rates. Therefore, while floating rate loans offer higher interest income when interest rates rise, they
will also generate less income when interest rates decline. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will
achieve the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has an expense reduction contractually guaranteed through 9/30/17. The Fund also has a fee waiver associated with any investments it makes in a Franklin
Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through its current fiscal year-end. Fund investment results reflect the expense reduction
and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the period indicated.
3. Average annual total return represents the change in value of an investment over the period indicated. Return for less than one year, if any, has not been annualized.
4. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this
report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
FRANKLIN PAYOUT 2021 FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions, if applicable; and (2) 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 table below 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 table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. 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): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
| | | | | | | | | | | | |
| | | | | | | Actual | | Hypothetical | | |
| | | | | (actual return after expenses) | | (5% annual return before expenses) | | |
| |
| | | | | | | Expenses | | | | Expenses | Net | |
| | | Beginning | | Ending | | Paid During | | Ending | | Paid During | Annualized | |
| Share | | Account | | Account | | Period | | Account | | Period | Expense | |
| Class | | Value 6/1/16 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | | Value 11/30/16 | | 6/1/16–11/30/161,2 | Ratio2 | |
| |
| R6 | $ | 1,000 | $ | 995.10 | $ | 1.45 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
| Advisor | $ | 1,000 | $ | 995.10 | $ | 1.45 | $ | 1,023.61 | $ | 1.47 | 0.29 | % |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above–in the far right column–multiplied by the simple average account value
over the period indicated, and then multiplied by 183/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
Semiannual Report 27
FRANKLIN FUND ALLOCATOR SERIES
| | | | | | |
| Financial Highlights | | | | | | |
| Franklin Payout 2017 Fund | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class R6 | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.03 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.06 | | | 0.11 | |
| Net realized and unrealized gains (losses) | | —d | | | —d | |
| Total from investment operations | | 0.06 | | | 0.11 | |
| Less distributions from net investment income. | | — | | | (0.08 | ) |
| Net asset value, end of period | $ | 10.09 | | $ | 10.03 | |
| |
| Total returne | | 0.60 | % | | 1.10 | % |
| |
| Ratios to average net assetsf | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.29 | % | | 4.11 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 1.14 | % | | 1.12 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 1,781 | | $ | 1,770 | |
| Portfolio turnover rate. | | —% | | | 4.47 | % |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dAmount rounds to less than $0.01 per share.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
28 Semiannual Report | The accompanying notes are an integral part of these financial statements.
| | | | | | |
| | | FRANKLIN FUND ALLOCATOR SERIES | |
| | | FINANCIAL HIGHLIGHTS | |
| |
| |
| Franklin Payout 2017 Fund (continued) | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Advisor Class | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.03 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.06 | | | 0.11 | |
| Net realized and unrealized gains (losses) | | —d | | | —d | |
| Total from investment operations | | 0.06 | | | 0.11 | |
| Less distributions from net investment income. | | — | | | (0.08 | ) |
| Net asset value, end of period | $ | 10.09 | | $ | 10.03 | |
| |
| Total returne | | 0.60 | % | | 1.10 | % |
| |
| Ratios to average net assetsf | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.29 | % | | 4.11 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 1.14 | % | | 1.12 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 1,781 | | $ | 1,770 | |
| Portfolio turnover rate. | | —% | | | 4.47 | % |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dAmount rounds to less than $0.01 per share.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements. | Semiannual Report 29
| | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | |
| |
| |
| |
| |
| Statement of Investments, November 30, 2016 (unaudited) | | | | | |
| Franklin Payout 2017 Fund | | | | | |
| | | | Principal | | |
| | Country | | Amount* | | Value |
| |
| Corporate Bonds 78.8% | | | | | |
| Automobiles & Components 1.4% | | | | | |
| a Hyundai Capital America, senior note, 144A, 2.125%, 10/02/17 | United States | $ | 50,000 | $ | 50,185 |
| Banks 14.3% | | | | | |
| Bank of America Corp., senior note, 6.40%, 8/28/17. | United States | | 100,000 | | 103,525 |
| Bank of Nova Scotia, senior note, 1.375%, 12/18/17 | Canada | | 100,000 | | 99,904 |
| HSBC USA Inc., senior note, 1.50%, 11/13/17 | United States | | 100,000 | | 99,961 |
| Royal Bank of Canada, secured note, 1.20%, 9/19/17 | Canada | | 100,000 | | 99,885 |
| Wells Fargo & Co., senior note, 5.625%, 12/11/17 | United States | | 100,000 | | 104,079 |
| | | | | | 507,354 |
| Capital Goods 4.3% | | | | | |
| General Dynamics Corp., senior note, 1.00%, 11/15/17 | United States | | 50,000 | | 49,958 |
| General Electric Co., senior note, 5.25%, 12/06/17 | United States | | 100,000 | | 104,072 |
| | | | | | 154,030 |
| Consumer Services 1.4% | | | | | |
| Carnival Corp., senior note, 1.875%, 12/15/17 | United States | | 50,000 | | 50,238 |
| Diversified Financials 8.8% | | | | | |
| The Bear Stearns Cos. LLC, senior note, 6.40%, 10/02/17 | United States | | 100,000 | | 104,061 |
| The Goldman Sachs Group Inc., senior note, 6.25%, 9/01/17 | United States | | 100,000 | | 103,363 |
| Morgan Stanley, senior note, 5.95%, 12/28/17 | United States | | 100,000 | | 104,500 |
| | | | | | 311,924 |
| Energy 10.2% | | | | | |
| Anadarko Petroleum Corp., senior note, 6.375%, 9/15/17 | United States | | 7,000 | | 7,273 |
| EOG Resources Inc., senior note, 5.875%, 9/15/17 | United States | | 100,000 | | 103,339 |
| Kinder Morgan Inc., senior note, 7.00%, 6/15/17 | United States | | 50,000 | | 51,333 |
| National Oilwell Varco Inc., senior note, 1.35%, 12/01/17 | United States | | 100,000 | | 99,666 |
| Statoil ASA, senior note, 1.25%, 11/09/17 | Norway | | 100,000 | | 99,878 |
| | | | | | 361,489 |
| Food & Staples Retailing 1.4% | | | | | |
| Walgreens Boots Alliance Inc., senior note, 1.75%, 11/17/17 | United States | | 50,000 | | 50,164 |
| Food, Beverage & Tobacco 1.4% | | | | | |
| Bunge Ltd. Finance Corp., senior note, 3.20%, 6/15/17. | United States | | 50,000 | | 50,451 |
| Health Care Equipment & Services 4.2% | | | | | |
| Aetna Inc., senior note, 1.50%, 11/15/17 | United States | | 100,000 | | 100,034 |
| Becton Dickinson and Co., senior note, 1.80%, 12/15/17. | United States | | 50,000 | | 50,106 |
| | | | | | 150,140 |
| Insurance 4.3% | | | | | |
| MetLife Inc., senior note, 1.903%, 12/15/17 | United States | | 100,000 | | 100,385 |
| Prudential Financial Inc., senior note, 6.00%, 12/01/17 | United States | | 50,000 | | 52,128 |
| | | | | | 152,513 |
| Materials 5.7% | | | | | |
| Ecolab Inc., senior note, 1.45%, 12/08/17 | United States | | 50,000 | | 49,994 |
| Potash Corp. of Saskatchewan Inc., senior note, 3.25%, 12/01/17 | Canada | | 100,000 | | 101,391 |
| Rohm & Haas Co., senior bond, 6.00%, 9/15/17 | United States | | 50,000 | | 51,767 |
| | | | | | 203,152 |
| Media 2.9% | | | | | |
| Time Warner Cos. Inc., senior bond, 7.25%, 10/15/17 | United States | | 50,000 | | 52,504 |
| Viacom Inc., senior note, 6.125%, 10/05/17 | United States | | 50,000 | | 51,793 |
| | | | | | 104,297 |
FRANKLIN FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
| | | | | |
| Franklin Payout 2017 Fund (continued) | | | | | |
| | | | Principal | | |
| | Country | | Amount* | | Value |
| |
| Corporate Bonds (continued) | | | | | |
| Pharmaceuticals, Biotechnology & Life Sciences 1.4% | | | | | |
| AbbVie Inc., senior note, 1.75%, 11/06/17 | United States | $ | 50,000 | $ | 50,338 |
| Semiconductors & Semiconductor Equipment 2.8% | | | | | |
| Intel Corp., senior note, 1.35%, 12/15/17. | United States | | 100,000 | | 100,212 |
| Software & Services 1.4% | | | | | |
| Autodesk Inc., senior note, 1.95%, 12/15/17 | United States | | 50,000 | | 50,132 |
| Technology Hardware & Equipment 1.4% | | | | | |
| a Hewlett Packard Enterprise Co., senior note, 144A, 2.45%, 10/05/17 | United States | | 50,000 | | 50,548 |
| Telecommunication Services 4.2% | | | | | |
| AT&T Inc., senior note, 1.40%, 12/01/17 | United States | | 50,000 | | 49,863 |
| Verizon Communications Inc., senior note, 1.10%, 11/01/17 | United States | | 100,000 | | 99,924 |
| | | | | | 149,787 |
| Utilities 7.3% | | | | | |
| American Electric Power Co. Inc., senior note, 1.65%, 12/15/17 | United States | | 50,000 | | 50,049 |
| CenterPoint Energy Resources Corp., senior note, 6.125%, 11/01/17 | United States | | 50,000 | | 52,059 |
| Pacific Gas & Electric Co., senior note, 5.625%, 11/30/17 | United States | | 100,000 | | 104,182 |
| TECO Finance Inc., senior note, 6.572%, 11/01/17 | United States | | 50,000 | | 52,184 |
| | | | | | 258,474 |
| Total Corporate Bonds (Cost $2,804,227) | | | | | 2,805,428 |
| |
| U.S. Government and Agency Securities 13.6% | | | | | |
| FHLB, | | | | | |
| 1.125%, 12/08/17 | United States | | 150,000 | | 150,303 |
| 3.125%, 12/08/17 | United States | | 155,000 | | 158,464 |
| FNMA, 0.875%, 12/20/17 | United States | | 175,000 | | 174,942 |
| Total U.S. Government and Agency Securities | | | | | |
| (Cost $483,670) | | | | | 483,709 |
| |
| Asset-Backed Securities (Cost $100,320) 2.8% | | | | | |
| Diversified Financials 2.8% | | | | | |
| Discover Card Execution Note Trust, 2014-A5, A, 1.39%, 4/15/20 | United States | | 100,000 | | 100,167 |
| Municipal Bonds (Cost $50,000) 1.4% | | | | | |
| Jersey City GO, Hudson County, Qualified Public Improvement, Refunding, Series A, 1.829%, | | | | | |
| 9/01/17 | United States | | 50,000 | | 50,063 |
| Total Investments before Short Term Investments (Cost $3,438,217) | | | | | 3,439,367 |
| |
| |
| | | | Shares | | |
| |
| Short Term Investments (Cost $108,560) 3.0% | | | | | |
| Money Market Funds 3.0% | | | | | |
| b,c Institutional Fiduciary Trust Money Market Portfolio | United States | | 108,560 | | 108,560 |
| Total Investments (Cost $3,546,777) 99.6% | | | | | 3,547,927 |
| Other Assets, less Liabilities 0.4% | | | | | 13,301 |
| Net Assets 100.0% | | | | $ | 3,561,228 |
Semiannual Report 31
FRANKLIN FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Payout 2017 Fund (continued)
See Abbreviations on page 65.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At
November 30, 2016, the aggregate value of these securities was $100,733, representing 2.8% of net assets.
bNon-income producing.
cSee Note 3(d) regarding investments in affiliated management investment companies.
| 32 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
FRANKLIN FUND ALLOCATOR SERIES
| | | | | | |
| Financial Highlights | | | | | | |
| Franklin Payout 2018 Fund | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class R6 | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.08 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.07 | | | 0.14 | |
| Net realized and unrealized gains (losses) | | (0.02 | ) | | 0.04 | |
| Total from investment operations | | 0.05 | | | 0.18 | |
| Less distributions from net investment income. | | — | | | (0.10 | ) |
| Net asset value, end of period | $ | 10.13 | | $ | 10.08 | |
| |
| Total returnd | | 0.50 | % | | 1.78 | % |
| |
| Ratios to average net assetse | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.31 | % | | 4.03 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 1.40 | % | | 1.39 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 1,789 | | $ | 1,781 | |
| Portfolio turnover rate. | | 2.90 | % | | 2.97 | % |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements. | Semiannual Report 33
| | | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | | |
| FINANCIAL HIGHLIGHTS | | | | | | |
| |
| |
| Franklin Payout 2018 Fund (continued) | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Advisor Class | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.08 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.07 | | | 0.14 | |
| Net realized and unrealized gains (losses) | | (0.02 | ) | | 0.04 | |
| Total from investment operations | | 0.05 | | | 0.18 | |
| Less distributions from net investment income. | | — | | | (0.10 | ) |
| Net asset value, end of period | $ | 10.13 | | $ | 10.08 | |
| |
| Total returnd | | 0.50 | % | | 1.78 | % |
| |
| Ratios to average net assetse | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.31 | % | | 4.03 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 1.40 | % | | 1.39 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 1,789 | | $ | 1,781 | |
| Portfolio turnover rate. | | 2.90 | % | | 2.97 | % |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
34 Semiannual Report | The accompanying notes are an integral part of these financial statements.
FRANKLIN FUND ALLOCATOR SERIES
| | | | | |
| Statement of Investments, November 30, 2016 (unaudited) | | | | | |
| Franklin Payout 2018 Fund | | | | | |
| | | | Principal | | |
| | Country | | Amount* | | Value |
| |
| Corporate Bonds 79.3% | | | | | |
| Automobiles & Components 2.8% | | | | | |
| Toyota Motor Credit Corp., senior note, 2.00%, 10/24/18 | United States | $ | 100,000 | $ | 100,642 |
| Banks 20.0% | | | | | |
| Bank of America Corp., senior note, 6.875%, 11/15/18 | United States | | 100,000 | | 109,244 |
| Bank of Nova Scotia, senior note, 2.05%, 10/30/18 | Canada | | 100,000 | | 100,654 |
| BNP Paribas SA, senior note, 2.40%, 12/12/18 | France | | 100,000 | | 100,899 |
| Citigroup Inc., senior note, 2.50%, 9/26/18 | United States | | 100,000 | | 101,030 |
| HSBC USA Inc., senior note, 2.625%, 9/24/18 | United States | | 100,000 | | 101,137 |
| KeyCorp., senior note, 2.30%, 12/13/18 | United States | | 50,000 | | 50,434 |
| Royal Bank of Canada, secured note, 2.00%, 10/01/18 | Canada | | 100,000 | | 100,613 |
| Suntrust Banks Inc., senior note, 2.35%, 11/01/18 | United States | | 50,000 | | 50,494 |
| | | | | | 714,505 |
| Capital Goods 9.0% | | | | | |
| Caterpillar Inc., senior note, 7.90%, 12/15/18. | United States | | 100,000 | | 112,412 |
| John Deere Capital Corp., senior note, 1.95%, 12/13/18 | United States | | 100,000 | | 100,620 |
| Raytheon Co., senior bond, 6.40%, 12/15/18 | United States | | 100,000 | | 109,716 |
| | | | | | 322,748 |
| Consumer Services 2.8% | | | | | |
| Starbucks Corp., senior note, 2.00%, 12/05/18 | United States | | 100,000 | | 100,951 |
| Diversified Financials 2.8% | | | | | |
| Morgan Stanley, senior note, 2.20%, 12/07/18 | United States | | 100,000 | | 100,498 |
| Energy 11.4% | | | | | |
| Apache Corp., senior note, 6.90%, 9/15/18 | United States | | 50,000 | | 54,029 |
| Devon Energy Corp., senior note, 2.25%, 12/15/18. | United States | | 50,000 | | 49,936 |
| Oneok Partners LP, senior note, 3.20%, 9/15/18 | United States | | 50,000 | | 51,112 |
| Shell International Finance BV, senior note, 2.00%, 11/15/18. | Netherlands | | 100,000 | | 100,696 |
| Spectra Energy Partners LP, senior note, 2.95%, 9/25/18 | United States | | 50,000 | | 50,759 |
| Statoil ASA, senior note, 1.95%, 11/08/18 | Norway | | 100,000 | | 100,448 |
| | | | | | 406,980 |
| Food & Staples Retailing 3.0% | | | | | |
| CVS Health Corp., senior note, 2.25%, 12/05/18 | United States | | 50,000 | | 50,392 |
| Kroger Co., senior bond, 6.80%, 12/15/18 | United States | | 50,000 | | 54,945 |
| | | | | | 105,337 |
| Food, Beverage & Tobacco 4.4% | | | | | |
| Altria Group Inc., senior note, 9.70%, 11/10/18 | United States | | 50,000 | | 57,562 |
| The Coca-Cola Co., senior note, 1.65%, 11/01/18 | United States | | 100,000 | | 100,537 |
| | | | | | 158,099 |
| Health Care Equipment & Services 2.8% | | | | | |
| Boston Scientific Corp., senior note, 2.65%, 10/01/18 | United States | | 50,000 | | 50,665 |
| Laboratory Corp. of America Holdings, senior note, 2.50%, 11/01/18 | United States | | 50,000 | | 50,516 |
| | | | | | 101,181 |
| Materials 2.8% | | | | | |
| Monsanto Co., senior note, 1.85%, 11/15/18 | United States | | 50,000 | | 49,885 |
| Praxair Inc., senior note, 1.25%, 11/07/18 | United States | | 50,000 | | 49,741 |
| | | | | | 99,626 |
Semiannual Report 35
FRANKLIN FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
| | | | | |
| Franklin Payout 2018 Fund (continued) | | | | | |
| | | | Principal | | |
| | Country | | Amount* | | Value |
| Corporate Bonds (continued) | | | | | |
| Pharmaceuticals, Biotechnology & Life Sciences 4.2% | | | | | |
| Abbvie Inc., senior note, 2.00%, 11/06/18 | United States | $ | 50,000 | $ | 50,123 |
| Thermo Fisher Scientific Inc., senior note, 2.15%, 12/14/18. | United States | | 100,000 | | 100,392 |
| | | | | | 150,515 |
| Real Estate 1.5% | | | | | |
| Boston Properties LP, senior note, 3.70%, 11/15/18 | United States | | 50,000 | | 51,645 |
| Semiconductors & Semiconductor Equipment 1.4% | | | | | |
| Maxim Integrated Products Inc., senior note, 2.50%, 11/15/18 | United States | | 50,000 | | 50,372 |
| Technology Hardware & Equipment 1.4% | | | | | |
| Tyco Electronics Group SA, senior note, 2.375%, 12/17/18 | Switzerland | | 50,000 | | 50,523 |
| Telecommunication Services 1.4% | | | | | |
| AT&T Inc., senior note, 2.375%, 11/27/18 | United States | | 50,000 | | 50,385 |
| Utilities 7.6% | | | | | |
| Berkshire Hathaway Energy Co., senior note, 2.00%, 11/15/18 | United States | | 50,000 | | 50,309 |
| Duke Energy Carolinas LLC, secured note, 7.00%, 11/15/18 | United States | | 100,000 | | 110,348 |
| Pacific Gas & Electric Co., senior note, 8.25%, 10/15/18 | United States | | 100,000 | | 111,573 |
| | | | | | 272,230 |
| Total Corporate Bonds (Cost $2,833,318) | | | | | 2,836,237 |
| U.S. Government and Agency Securities 17.2% | | | | | |
| FHLB, 3.75%, 12/14/18. | United States | | 125,000 | | 131,234 |
| FNMA, 1.625%, 11/27/18 | United States | | 175,000 | | 176,572 |
| U.S. Treasury Note, | | | | | |
| 1.375%, 12/31/18 | United States | | 130,000 | | 130,630 |
| 1.50%, 12/31/18 | United States | | 175,000 | | 176,302 |
| Total U.S. Government and Agency Securities | | | | | |
| (Cost $613,719) | | | | | 614,738 |
| Total Investments before Short Term Investments (Cost $3,447,037) | | | | | 3,450,975 |
| |
| |
| | | | Shares | | |
| Short Term Investments (Cost $119,188) 3.3% | | | | | |
| Money Market Funds 3.3% | | | | | |
| a,b Institutional Fiduciary Trust Money Market Portfolio | United States | | 119,188 | | 119,188 |
| Total Investments (Cost $3,566,225) 99.8% | | | | | 3,570,163 |
| Other Assets, less Liabilities 0.2% | | | | | 8,474 |
| Net Assets 100.0% | | | | $ | 3,578,637 |
See Abbreviations on page 65.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 3(d) regarding investments in affiliated management investment companies.
| 36 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
FRANKLIN FUND ALLOCATOR SERIES
| | | | | | |
| Financial Highlights | | | | | | |
| Franklin Payout 2019 Fund | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class R6 | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.16 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.09 | | | 0.18 | |
| Net realized and unrealized gains (losses) | | (0.05 | ) | | 0.10 | |
| Total from investment operations | | 0.04 | | | 0.28 | |
| Less distributions from net investment income. | | — | | | (0.12 | ) |
| Net asset value, end of period | $ | 10.20 | | $ | 10.16 | |
| |
| Total returnd | | 0.39 | % | | 2.85 | % |
| |
| Ratios to average net assetse | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.05 | % | | 3.57 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 1.80 | % | | 1.80 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 2,064 | | $ | 2,057 | |
| Portfolio turnover rate. | | —% | | | —%f | |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fRounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements. | Semiannual Report 37
| | | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | | |
| FINANCIAL HIGHLIGHTS | | | | | | |
| |
| |
| Franklin Payout 2019 Fund (continued) | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Advisor Class | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.16 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.09 | | | 0.18 | |
| Net realized and unrealized gains (losses) | | (0.05 | ) | | 0.10 | |
| Total from investment operations | | 0.04 | | | 0.28 | |
| Less distributions from net investment income. | | — | | | (0.12 | ) |
| Net asset value, end of period | $ | 10.20 | | $ | 10.16 | |
| |
| Total returnd | | 0.39 | % | | 2.85 | % |
| |
| Ratios to average net assetse | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.05 | % | | 3.57 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 1.80 | % | | 1.80 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 2,064 | | $ | 2,057 | |
| Portfolio turnover rate. | | —% | | | —%f | |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fRounds to less than 0.01%.
| 38 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
FRANKLIN FUND ALLOCATOR SERIES
| | | | | |
| Statement of Investments, November 30, 2016 (unaudited) | | | | | |
| |
| Franklin Payout 2019 Fund | | | | | |
| | | | Principal | | |
| | Country | | Amount* | | Value |
| |
| Corporate Bonds 79.3% | | | | | |
| Banks 14.8% | | | | | |
| Bank of Nova Scotia, secured note, 2.125%, 9/11/19 | Canada | $ | 100,000 | $ | 100,392 |
| HSBC USA Inc., senior note, 2.375%, 11/13/19 | United States | | 100,000 | | 100,203 |
| JPMorgan Chase & Co., senior note, 2.20%, 10/22/19 | United States | | 100,000 | | 100,348 |
| Royal Bank of Canada, secured note, 2.20%, 9/23/19 | Canada | | 100,000 | | 100,686 |
| The Toronto-Dominion Bank, senior note, 2.25%, 11/05/19 | Canada | | 100,000 | | 100,680 |
| Westpac Banking Corp., senior note, 4.875%, 11/19/19 | Australia | | 100,000 | | 107,522 |
| | | | | | 609,831 |
| Capital Goods 15.3% | | | | | |
| Boeing Capital Corp., senior note, 4.70%, 10/27/19 | United States | | 100,000 | | 108,307 |
| Caterpillar Financial Services Corp., senior note, 2.25%, 12/01/19 | United States | | 100,000 | | 100,632 |
| Deere & Co., senior note, 4.375%, 10/16/19 | United States | | 100,000 | | 106,733 |
| Emerson Electric Co., senior bond, 4.875%, 10/15/19. | United States | | 100,000 | | 108,379 |
| General Electric Co., senior secured note, first lien, 2.10%, 12/11/19 | United States | | 100,000 | | 100,605 |
| Lockheed Martin Corp., senior note, 4.25%, 11/15/19 | United States | | 100,000 | | 106,727 |
| | | | | | 631,383 |
| Commercial & Professional Services 1.3% | | | | | |
| Republic Services Inc., senior note, 5.50%, 9/15/19 | United States | | 50,000 | | 54,596 |
| Diversified Financials 5.1% | | | | | |
| Goldman Sachs Group Inc., senior note, 2.55%, 10/23/19. | United States | | 100,000 | | 100,696 |
| Morgan Stanley, senior note, 5.625%, 9/23/19 | United States | | 100,000 | | 108,697 |
| | | | | | 209,393 |
| Energy 9.9% | | | | | |
| Chevron Corp., senior note, 2.193%, 11/15/19 | United States | | 100,000 | | 101,058 |
| Enterprise Products Operating LLC, senior note, 2.55%, 10/15/19 | United States | | 50,000 | | 50,492 |
| Kinder Morgan Inc., senior note, 3.05%, 12/01/19 | United States | | 50,000 | | 50,665 |
| Plains All American Pipeline LP/PAA Finance Corp., senior note, 2.60%, 12/15/19 | United States | | 50,000 | | 50,072 |
| Pride International Inc., senior bond, 8.50%, 6/15/19 | United States | | 50,000 | | 53,937 |
| Statoil ASA, senior note, 2.25%, 11/08/19 | Norway | | 100,000 | | 100,772 |
| | | | | | 406,996 |
| Food & Staples Retailing 3.7% | | | | | |
| Costco Wholesale Corp., senior note, 1.70%, 12/15/19 | United States | | 100,000 | | 100,095 |
| Walgreens Boots Alliance Inc., senior note, 2.70%, 11/18/19 | United States | | 50,000 | | 50,717 |
| | | | | | 150,812 |
| Food, Beverage & Tobacco 4.1% | | | | | |
| Anheuser-Busch InBev Worldwide Inc., senior note, 6.875%, 11/15/19 | Belgium | | 100,000 | | 113,557 |
| Mead Johnson Nutrition Co., senior note, 4.90%, 11/01/19 | United States | | 50,000 | | 53,728 |
| | | | | | 167,285 |
| Health Care Equipment & Services 5.0% | | | | | |
| Becton Dickinson and Co., senior note, 2.675%, 12/15/19. | United States | | 50,000 | | 50,920 |
| UnitedHealth Group Inc., senior note, 2.30%, 12/15/19 | United States | | 100,000 | | 101,026 |
| Zimmer Biomet Holdings Inc., senior bond, 4.625%, 11/30/19 | United States | | 50,000 | | 53,072 |
| | | | | | 205,018 |
| Insurance 1.4% | | | | | |
| CNA Financial Corp., senior bond, 7.35%, 11/15/19 | United States | | 50,000 | | 56,999 |
| Materials 3.7% | | | | | |
| Eastman Chemical Co., senior bond, 5.50%, 11/15/19 | United States | | 50,000 | | 54,268 |
| PPG Industries Inc., senior note, 2.30%, 11/15/19 | United States | | 100,000 | | 100,040 |
| | | | | | 154,308 |
Semiannual Report 39
FRANKLIN FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
| | | | | |
| Franklin Payout 2019 Fund (continued) | | | | | |
| | | | Principal | | |
| | Country | | Amount* | | Value |
| |
| Corporate Bonds (continued) | | | | | |
| Media 2.4% | | | | | |
| Scripps Networks Interactive Inc., senior note, 2.75%, 11/15/19 | United States | $ | 50,000 | $ | 50,661 |
| Viacom Inc., senior note, 2.75%, 12/15/19. | United States | | 50,000 | | 50,380 |
| | | | | | 101,041 |
| Pharmaceuticals, Biotechnology & Life Sciences 2.4% | | | | | |
| Johnson & Johnson, senior note, 1.875%, 12/05/19 | United States | | 100,000 | | 100,552 |
| Real Estate 1.4% | | | | | |
| Weyerhaeuser Co., senior note, 7.375%, 10/01/19 | United States | | 50,000 | | 56,490 |
| Telecommunication Services 1.3% | | | | | |
| AT&T Inc., senior note, 5.875%, 10/01/19 | United States | | 50,000 | | 54,704 |
| Utilities 7.5% | | | | | |
| Dominion Resources Inc., senior note, 2.50%, 12/01/19 | United States | | 50,000 | | 50,621 |
| DTE Energy Co., senior note, 2.40%, 12/01/19 | United States | | 50,000 | | 50,357 |
| Georgia Power Co., senior note, 4.25%, 12/01/19 | United States | | 100,000 | | 106,636 |
| Progress Energy Inc., senior bond, 4.875%, 12/01/19. | United States | | 50,000 | | 53,803 |
| Public Service Electric and Gas Co., secured note, 2.00%, 8/15/19 | United States | | 50,000 | | 50,344 |
| | | | | | 311,761 |
| Total Corporate Bonds (Cost $3,257,078) | | | | | 3,271,169 |
| |
| U.S. Government and Agency Securities 17.6% | | | | | |
| FFCB, 1.95%, 12/17/19. | United States | | 150,000 | | 151,797 |
| FHLB, | | | | | |
| 1.25%, 12/13/19 | United States | | 160,000 | | 158,984 |
| 2.375%, 12/13/19 | United States | | 210,000 | | 215,329 |
| FNMA, 1.75%, 11/26/19 | United States | | 200,000 | | 201,592 |
| Total U.S. Government and Agency Securities | | | | | |
| (Cost $724,531) | | | | | 727,702 |
| Total Investments before Short Term Investments (Cost $3,981,609) | | | | | 3,998,871 |
| |
| |
| | | | Shares | | |
| |
| Short Term Investments (Cost $121,106) 2.9% | | | | | |
| Money Market Funds 2.9% | | | | | |
| a,b Institutional Fiduciary Trust Money Market Portfolio | United States | | 121,106 | | 121,106 |
| Total Investments (Cost $4,102,715) 99.8% | | | | | 4,119,977 |
| Other Assets, less Liabilities 0.2% | | | | | 8,698 |
| Net Assets 100.0% | | | | $ | 4,128,675 |
See Abbreviations on page 65.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 3(d) regarding investments in affiliated management investment companies.
| 40 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
FRANKLIN FUND ALLOCATOR SERIES
| | | | | | |
| Financial Highlights | | | | | | |
| Franklin Payout 2020 Fund | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class R6 | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.17 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.10 | | | 0.20 | |
| Net realized and unrealized gains (losses) | | (0.10 | ) | | 0.11 | |
| Total from investment operations | | — | | | 0.31 | |
| Less distributions from net investment income. | | — | | | (0.14 | ) |
| Net asset value, end of period | $ | 10.17 | | $ | 10.17 | |
| |
| Total returnd | | —% | | | 3.10 | % |
| |
| Ratios to average net assetse | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.02 | % | | 3.59 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 2.00 | % | | 2.01 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 2,062 | | $ | 2,061 | |
| Portfolio turnover rate. | | —% | | | 4.23 | % |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements. | Semiannual Report 41
| | | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | | |
| FINANCIAL HIGHLIGHTS | | | | | | |
| |
| |
| Franklin Payout 2020 Fund (continued) | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Advisor Class | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.17 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.10 | | | 0.20 | |
| Net realized and unrealized gains (losses) | | (0.10 | ) | | 0.11 | |
| Total from investment operations | | — | | | 0.31 | |
| Less distributions from net investment income. | | — | | | (0.14 | ) |
| Net asset value, end of period | $ | 10.17 | | $ | 10.17 | |
| |
| Total returnd | | —% | | | 3.10 | % |
| |
| Ratios to average net assetse | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.02 | % | | 3.59 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 2.00 | % | | 2.01 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 2,062 | | $ | 2,061 | |
| Portfolio turnover rate. | | —% | | | 4.23 | % |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
| 42 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
FRANKLIN FUND ALLOCATOR SERIES
| | | | | |
| Statement of Investments, November 30, 2016 (unaudited) | | | | | |
| Franklin Payout 2020 Fund | | | | | |
| | Country/ | | Principal | | |
| | Organization | | Amount* | | Value |
| |
| Corporate Bonds 74.7% | | | | | |
| Banks 5.0% | | | | | |
| Bank of America Corp., senior note, 2.625%, 10/19/20 | United States | $ | 100,000 | $ | 100,039 |
| JPMorgan Chase & Co., senior note, 4.25%, 10/15/20 | United States | | 100,000 | | 106,177 |
| | | | | | 206,216 |
| Capital Goods 8.7% | | | | | |
| Boeing Co., senior note, 1.65%, 10/30/20 | United States | | 100,000 | | 98,326 |
| Emerson Electric Co., senior bond, 4.25%, 11/15/20 | United States | | 100,000 | | 106,983 |
| Lockheed Martin Corp., senior note, 2.50%, 11/23/20 | United States | | 50,000 | | 50,369 |
| Raytheon Co., senior note, 3.125%, 10/15/20 | United States | | 100,000 | | 103,453 |
| | | | | | 359,131 |
| Consumer Services 2.5% | | | | | |
| Carnival Corp., senior note, 3.95%, 10/15/20 | United States | | 50,000 | | 52,624 |
| Yum! Brands Inc., senior bond, 3.875%, 11/01/20 | United States | | 50,000 | | 50,937 |
| | | | | | 103,561 |
| Diversified Financials 5.2% | | | | | |
| Morgan Stanley, senior note, 5.50%, 7/24/20 | United States | | 100,000 | | 109,640 |
| Northern Trust Corp., senior note, 3.45%, 11/04/20 | United States | | 100,000 | | 103,960 |
| | | | | | 213,600 |
| Energy 7.5% | | | | | |
| Energy Transfer Partners LP, senior note, 4.15%, 10/01/20 | United States | | 50,000 | | 51,731 |
| Enterprise Products Operating LLC, senior note, 5.20%, 9/01/20 | United States | | 50,000 | | 54,722 |
| Pride International Inc., senior bond, 6.875%, 8/15/20 | United States | | 50,000 | | 51,075 |
| Statoil ASA, senior note, 2.90%, 11/08/20 | Norway | | 100,000 | | 101,915 |
| Williams Partners LP, senior note, 4.125%, 11/15/20. | United States | | 50,000 | | 51,177 |
| | | | | | 310,620 |
| Food, Beverage & Tobacco 7.6% | | | | | |
| Coca Cola Co., senior note, 3.15%, 11/15/20 | United States | | 100,000 | | 104,092 |
| Hershey Co., senior note, 4.125%, 12/01/20 | United States | | 100,000 | | 106,939 |
| PepsiCo Inc., senior bond, 3.125%, 11/01/20. | United States | | 100,000 | | 103,417 |
| | | | | | 314,448 |
| Health Care Equipment & Services 8.9% | | | | | |
| Aetna Inc., senior bond, 3.95%, 9/01/20 | United States | | 100,000 | | 104,832 |
| Becton Dickinson and Co., senior note, 3.25%, 11/12/20. | United States | | 50,000 | | 51,402 |
| Cigna Corp., senior bond, 4.375%, 12/15/20 | United States | | 50,000 | | 53,130 |
| Laboratory Corp. of America Holdings, senior note, 4.625%, 11/15/20 | United States | | 50,000 | | 53,431 |
| UnitedHealth Group Inc., senior note, 3.875%, 10/15/20 | United States | | 100,000 | | 105,418 |
| | | | | | 368,213 |
| Household & Personal Products 2.5% | | | | | |
| Colgate-Palmolive Co., senior note, 2.95%, 11/01/20 | United States | | 100,000 | | 103,548 |
| Insurance 9.1% | | | | | |
| AEGON Funding Co. LLC, senior bond, 5.75%, 12/15/20 | United States | | 100,000 | | 111,359 |
| Berkshire Hathaway Finance Corp., senior note, 2.90%, 10/15/20 | United States | | 100,000 | | 102,690 |
| Prudential Financial Inc., senior note, 4.50%, 11/15/20 | United States | | 50,000 | | 53,726 |
| Travelers Cos. Inc., senior note, 3.90%, 11/01/20 | United States | | 100,000 | | 106,172 |
| | | | | | 373,947 |
Semiannual Report 43
FRANKLIN FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
| | | | | |
| Franklin Payout 2020 Fund (continued) | | | | | |
| | Country/ | | Principal | | |
| | Organization | | Amount* | | Value |
| |
| Corporate Bonds (continued) | | | | | |
| Materials 2.1% | | | | | |
| The Dow Chemical Co., senior bond, 4.25%, 11/15/20 | United States | $ | 31,000 | $ | 32,926 |
| a Georgia-Pacific LLC, senior note, 144A, 5.40%, 11/01/20 | United States | | 50,000 | | 55,049 |
| | | | | | 87,975 |
| Media 1.4% | | | | | |
| 21st Century Fox America Inc., senior bond, 5.65%, 8/15/20 | United States | | 50,000 | | 55,541 |
| Pharmaceuticals, Biotechnology & Life Sciences 2.5% | | | | | |
| Amgen Inc., senior note, 3.45%, 10/01/20 | United States | | 50,000 | | 51,736 |
| Celgene Corp., senior bond, 3.95%, 10/15/20 | United States | | 50,000 | | 52,430 |
| | | | | | 104,166 |
| Technology Hardware & Equipment 0.2% | | | | | |
| HP Inc., senior note, 3.75%, 12/01/20 | United States | | 9,000 | | 9,347 |
| Utilities 11.5% | | | | | |
| Alabama Power Co., senior note, 3.375%, 10/01/20 | United States | | 100,000 | | 103,937 |
| Constellation Energy Group, senior note, 5.15%, 12/01/20 | United States | | 50,000 | | 54,265 |
| Exelon Generation Co. LLC, senior bond, 4.00%, 10/01/20 | United States | | 50,000 | | 51,984 |
| Kinder Morgan Energy Partners LP, senior bond, 5.30%, 9/15/20 | United States | | 50,000 | | 53,572 |
| Pacific Gas & Electric Co., senior note, 3.50%, 10/01/20 | United States | | 100,000 | | 104,008 |
| Transcanada Pipelines Ltd., senior bond, 3.80%, 10/01/20 | Canada | | 100,000 | | 104,695 |
| | | | | | 472,461 |
| Total Corporate Bonds (Cost $3,079,537) | | | | | 3,082,774 |
| |
| Foreign Government and Agency Securities 4.9% | | | | | |
| Inter-American Development Bank, senior note, 2.125%, 11/09/20 | Supranationalb | | 100,000 | | 101,077 |
| International Bank for Reconstruction and Development, senior note, 2.125%, 11/01/20 | Supranationalb | | 100,000 | | 101,282 |
| Total Foreign Government and Agency Securities | | | | | |
| (Cost $201,823) | | | | | 202,359 |
| |
| U.S. Government and Agency Securities 17.4% | | | | | |
| FHLB, 3.125%, 12/11/20 | United States | | 200,000 | | 209,758 |
| U.S. Treasury Note, | | | | | |
| 2.625%, 11/15/20 | United States | | 145,000 | | 150,123 |
| 2.00%, 11/30/20 | United States | | 145,000 | | 146,589 |
| 2.375%, 12/31/20 | United States | | 205,000 | | 210,209 |
| Total U.S. Government and Agency Securities | | | | | |
| (Cost $715,521) | | | | | 716,679 |
| Total Investments before Short Term Investments (Cost $3,996,881) | | | | | 4,001,812 |
| |
| |
| | | | Shares | | |
| |
| Short Term Investments (Cost $113,182) 2.8% | | | | | |
| Money Market Funds 2.8% | | | | | |
| c,d Institutional Fiduciary Trust Money Market Portfolio | United States | | 113,182 | | 113,182 |
| Total Investments (Cost $4,110,063) 99.8% | | | | | 4,114,994 |
| Other Assets, less Liabilities 0.2% | | | | | 9,837 |
| Net Assets 100.0%. | | | | $ | 4,124,831 |
FRANKLIN FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Payout 2020 Fund (continued)
See Abbreviations on page 65.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At
November 30, 2016, the value of this security was $55,049, representing 1.3% of net assets.
bA supranational organization is an entity formed by two or more central governments through international treaties.
cNon-income producing.
dSee Note 3(d) regarding investments in affiliated management investment companies.
The accompanying notes are an integral part of these financial statements. | Semiannual Report 45
FRANKLIN FUND ALLOCATOR SERIES
| | | | | | |
| Financial Highlights | | | | | | |
| Franklin Payout 2021 Fund | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class R6 | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.30 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.11 | | | 0.22 | |
| Net realized and unrealized gains (losses) | | (0.16 | ) | | 0.23 | |
| Total from investment operations | | (0.05 | ) | | 0.45 | |
| Less distributions from net investment income. | | — | | | (0.15 | ) |
| Net asset value, end of period | $ | 10.25 | | $ | 10.30 | |
| |
| Total returnd | | (0.49 | )% | | 4.55 | % |
| |
| Ratios to average net assetse | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.00 | % | | 3.56 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 2.18 | % | | 2.21 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 2,081 | | $ | 2,090 | |
| Portfolio turnover rate. | | —% | | | —% | |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
| 46 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
| | | | | | |
| | | FRANKLIN FUND ALLOCATOR SERIES | |
| | | FINANCIAL HIGHLIGHTS | |
| |
| |
| Franklin Payout 2021 Fund (continued) | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Advisor Class | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.30 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec | | 0.11 | | | 0.22 | |
| Net realized and unrealized gains (losses) | | (0.16 | ) | | 0.23 | |
| Total from investment operations | | (0.05 | ) | | 0.45 | |
| Less distributions from net investment income. | | — | | | (0.15 | ) |
| Net asset value, end of period | $ | 10.25 | | $ | 10.30 | |
| |
| Total returnd | | (0.49 | )% | | 4.55 | % |
| |
| Ratios to average net assetse | | | | | | |
| Expenses before waiver and payments by affiliates | | 2.00 | % | | 3.56 | % |
| Expenses net of waiver and payments by affiliates | | 0.29 | % | | 0.29 | % |
| Net investment income | | 2.18 | % | | 2.21 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 2,081 | | $ | 2,090 | |
| Portfolio turnover rate. | | —% | | | —% | |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements. | Semiannual Report 47
| | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | |
| |
| |
| |
| |
| Statement of Investments, November 30, 2016 (unaudited) | | | | | |
| Franklin Payout 2021 Fund | | | | | |
| | Country/ | | Principal | | |
| | Organization | | Amount* | | Value |
| |
| Corporate Bonds 74.0% | | | | | |
| Capital Goods 10.0% | | | | | |
| The Boeing Co., senior note, 2.35%, 10/30/21 | United States | $ | 100,000 | $ | 100,553 |
| Emerson Electric Co., senior note, 2.625%, 12/01/21 | United States | | 100,000 | | 101,186 |
| General Electric Co., senior note, 4.65%, 10/17/21 | United States | | 100,000 | | 110,249 |
| John Deere Capital Corp., senior bond, 3.15%, 10/15/21. | United States | | 100,000 | | 102,950 |
| | | | | | 414,938 |
| Consumer Services 2.4% | | | | | |
| Marriott International Inc., senior note, N, 3.125%, 10/15/21 | United States | | 50,000 | | 50,586 |
| Yum! Brands Inc., senior bond, 3.75%, 11/01/21 | United States | | 50,000 | | 50,500 |
| | | | | | 101,086 |
| Diversified Financials 5.1% | | | | | |
| Bank of New York Mellon Corp., senior note, 3.55%, 9/23/21. | United States | | 100,000 | | 104,295 |
| Berkshire Hathaway Inc., senior note, 3.75%, 8/15/21. | United States | | 100,000 | | 106,561 |
| | | | | | 210,856 |
| Energy 13.6% | | | | | |
| BP Capital Markets PLC, senior note, 3.561%, 11/01/21 | United Kingdom | | 100,000 | | 104,035 |
| ConocoPhillips Co., senior note, 2.875%, 11/15/21 | United States | | 100,000 | | 100,502 |
| Halliburton Co., senior bond, 3.25%, 11/15/21 | United States | | 100,000 | | 102,005 |
| Statoil ASA, senior note, 2.75%, 11/10/21 | Norway | | 100,000 | | 101,083 |
| Total Capital SA, senior bond, 4.25%, 12/15/21 | France | | 100,000 | | 107,908 |
| Williams Partners LP, senior note, 4.00%, 11/15/21 | United States | | 50,000 | | 50,895 |
| | | | | | 566,428 |
| Food & Staples Retailing 2.4% | | | | | |
| The Kroger Co., senior note, 2.95%, 11/01/21 | United States | | 50,000 | | 50,587 |
| Walgreens Boots Alliance Inc., senior note, 3.30%, 11/18/21 | United States | | 50,000 | | 51,028 |
| | | | | | 101,615 |
| Food, Beverage & Tobacco 3.7% | | | | | |
| General Mills Inc., senior bond, 3.15%, 12/15/21 | United States | | 50,000 | | 51,305 |
| Philip Morris International Inc., senior note, 2.90%, 11/15/21 | United States | | 100,000 | | 101,440 |
| | | | | | 152,745 |
| Health Care Equipment & Services 3.8% | | | | | |
| Express Scripts Holding Co., senior note, 4.75%, 11/15/21 | United States | | 50,000 | | 54,040 |
| UnitedHealth Group Inc., senior note, 3.375%, 11/15/21 | United States | | 100,000 | | 104,289 |
| | | | | | 158,329 |
| Insurance 1.3% | | | | | |
| Prudential Financial Inc., senior note, 4.50%, 11/16/21 | United States | | 50,000 | | 54,294 |
| Materials 5.0% | | | | | |
| Air Products & Chemicals Inc., senior note, 3.00%, 11/03/21 | United States | | 100,000 | | 103,174 |
| The Dow Chemical Co., senior bond, 4.125%, 11/15/21 | United States | | 50,000 | | 52,974 |
| Ecolab Inc., senior note, 4.35%, 12/08/21 | United States | | 50,000 | | 53,836 |
| | | | | | 209,984 |
| Pharmaceuticals, Biotechnology & Life Sciences 6.3% | | | | | |
| Gilead Sciences Inc., senior note, 4.40%, 12/01/21 | United States | | 100,000 | | 108,072 |
| Johnson & Johnson, senior note, 2.45%, 12/05/21 | United States | | 100,000 | | 101,017 |
| PerkinElmer Inc., senior note, 5.00%, 11/15/21 | United States | | 50,000 | | 53,381 |
| | | | | | 262,470 |
FRANKLIN FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
| | | | | |
| Franklin Payout 2021 Fund (continued) | | | | | |
| | Country/ | | Principal | | |
| | Organization | | Amount* | | Value |
| Corporate Bonds (continued) | | | | | |
| Real Estate 3.9% | | | | | |
| American Tower Corp., senior note, 5.90%, 11/01/21 | United States | $ | 50,000 | $ | 56,475 |
| Simon Property Group LP, senior bond, 4.125%, 12/01/21. | United States | | 100,000 | | 106,754 |
| | | | | | 163,229 |
| Semiconductors & Semiconductor Equipment 2.5% | | | | | |
| Intel Corp., senior note, 3.30%, 10/01/21 | United States | | 100,000 | | 104,120 |
| Software & Services 2.5% | | | | | |
| International Business Machines Corp., senior note, 2.90%, 11/01/21. | United States | | 100,000 | | 102,063 |
| Technology Hardware & Equipment 2.7% | | | | | |
| Thomas & Betts Corp., senior bond, 5.625%, 11/15/21 | United States | | 100,000 | | 112,070 |
| Telecommunication Services 3.9% | | | | | |
| a Telstra Corp. Ltd., senior note, 144A, 4.80%, 10/12/21 | Australia | | 100,000 | | 109,885 |
| Verizon Communications Inc., senior note, 3.00%, 11/01/21 | United States | | 50,000 | | 50,467 |
| | | | | | 160,352 |
| Transportation 1.2% | | | | | |
| Norfolk Southern Corp., senior bond, 3.25%, 12/01/21 | United States | | 50,000 | | 51,478 |
| Utilities 3.7% | | | | | |
| Baltimore Gas & Electric Co., senior note, 3.50%, 11/15/21 | United States | | 50,000 | | 51,991 |
| Pacific Gas & Electric Co., senior note, 3.25%, 9/15/21 | United States | | 100,000 | | 102,833 |
| | | | | | 154,824 |
| Total Corporate Bonds (Cost $3,060,501) | | | | | 3,080,881 |
| Foreign Government and Agency Securities (Cost $100,141) 2.4% | | | | | |
| European Investment Bank, senior note, 2.125%, 10/15/21 | Supranationalb | | 100,000 | | 99,824 |
| U.S. Government and Agency Securities 17.5% | | | | | |
| FFCB, 2.00%, 12/01/21. | United States | | 200,000 | | 199,315 |
| FHLB, 2.625%, 12/10/21 | United States | | 200,000 | | 206,765 |
| U.S. Treasury Note, | | | | | |
| 1.875%, 11/30/21 | United States | | 160,000 | | 159,781 |
| 2.125%, 12/31/21 | United States | | 160,000 | | 161,544 |
| Total U.S. Government and Agency Securities | | | | | |
| (Cost $723,291) | | | | | 727,405 |
| Municipal Bonds (Cost $113,926) 2.8% | | | | | |
| California State GO, Various Purpose, 5.70%, 11/01/21 | United States | | 100,000 | | 115,242 |
| Total Investments before Short Term Investments (Cost $3,997,859) | | | | | 4,023,352 |
| |
| |
| | | | Shares | | |
| Short Term Investments (Cost $129,997) 3.1% | | | | | |
| Money Market Funds 3.1% | | | | | |
| c,d Institutional Fiduciary Trust Money Market Portfolio | United States | | 129,997 | | 129,997 |
| Total Investments (Cost $4,127,856) 99.8% | | | | | 4,153,349 |
| Other Assets, less Liabilities 0.2% | | | | | 8,175 |
| Net Assets 100.0%. | | | | $ | 4,161,524 |
Semiannual Report 49
FRANKLIN FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Payout 2021 Fund (continued)
See Abbreviations on page 65.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At
November 30, 2016, the value of this security was $109,885, representing 2.6% of net assets.
bA supranational organization is an entity formed by two or more central governments through international treaties.
cNon-income producing.
dSee Note 3(d) regarding investments in affiliated management investment companies.
| 50 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
| | | | | | |
| | | FRANKLIN FUND ALLOCATOR SERIES |
| |
| |
| |
| |
| Financial Statements | | | | | | |
| |
| |
| Statements of Assets and Liabilities | | | | | | |
| November 30, 2016 (unaudited) | | | | | | |
| |
| | | Franklin | | Franklin | | Franklin |
| | | Payout 2017 | | Payout 2018 | | Payout 2019 |
| | | Fund | | Fund | | Fund |
| Assets: | | | | | | |
| Investments in securities: | | | | | | |
| Cost - Unaffiliated issuers | $ | 3,438,217 | $ | 3,447,037 | $ | 3,981,609 |
| Cost - Non-controlled affiliates (Note 3d) | | 108,560 | | 119,188 | | 121,106 |
| Total cost of investments | $ | 3,546,777 | $ | 3,566,225 | $ | 4,102,715 |
| Value - Unaffiliated issuers | $ | 3,439,367 | $ | 3,450,975 | $ | 3,998,871 |
| Value - Non-controlled affiliates (Note 3d) | | 108,560 | | 119,188 | | 121,106 |
| Total value of investments | | 3,547,927 | | 3,570,163 | | 4,119,977 |
| Receivables: | | | | | | |
| Interest | | 30,474 | | 25,201 | | 26,417 |
| Affiliates | | 6,005 | | 6,205 | | 5,670 |
| Total assets | | 3,584,406 | | 3,601,569 | | 4,152,064 |
| Liabilities: | | | | | | |
| Payables: | | | | | | |
| Transfer agent fees | | — | | 9 | | 2 |
| Reports to shareholders | | 2,403 | | 2,361 | | 2,217 |
| Professional fees | | 20,751 | | 20,538 | | 21,140 |
| Accrued expenses and other liabilities. | | 24 | | 24 | | 30 |
| Total liabilities | | 23,178 | | 22,932 | | 23,389 |
| Net assets, at value | $ | 3,561,228 | $ | 3,578,637 | $ | 4,128,675 |
| Net assets consist of: | | | | | | |
| Paid-in capital | $ | 3,523,308 | $ | 3,529,322 | $ | 4,043,899 |
| Undistributed net investment income | | 36,177 | | 44,801 | | 66,079 |
| Net unrealized appreciation (depreciation) | | 1,150 | | 3,938 | | 17,262 |
| Accumulated net realized gain (loss) | | 593 | | 576 | | 1,435 |
| Net assets, at value | $ | 3,561,228 | $ | 3,578,637 | $ | 4,128,675 |
| Class R6: | | | | | | |
| Net assets, at value | $ | 1,780,602 | $ | 1,789,300 | $ | 2,064,314 |
| Shares outstanding. | | 176,398 | | 176,701 | | 202,465 |
| Net asset value and maximum offering price per share | $ | 10.09 | $ | 10.13 | $ | 10.20 |
| Advisor Class: | | | | | | |
| Net assets, at value | $ | 1,780,626 | $ | 1,789,337 | $ | 2,064,361 |
| Shares outstanding. | | 176,398 | | 176,701 | | 202,465 |
| Net asset value and maximum offering price per share | $ | 10.09 | $ | 10.13 | $ | 10.20 |
The accompanying notes are an integral part of these financial statements. | Semiannual Report 51
| | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | |
| FINANCIAL STATEMENTS | | | | | |
| |
| |
| Statements of Assets and Liabilities (continued) | | | | | |
| November 30, 2016 (unaudited) | | | | | |
| |
| | | Franklin | | | Franklin |
| | | Payout 2020 | | | Payout 2021 |
| | | Fund | | | Fund |
| Assets: | | | | | |
| Investments in securities: | | | | | |
| Cost - Unaffiliated issuers | $ | 3,996,881 | | $ | 3,997,859 |
| Cost - Non-controlled affiliates (Note 3d) | | 113,182 | | | 129,997 |
| Total cost of investments | $ | 4,110,063 | | $ | 4,127,856 |
| Value - Unaffiliated issuers | $ | 4,001,812 | | $ | 4,023,352 |
| Value - Non-controlled affiliates (Note 3d) | | 113,182 | | | 129,997 |
| Total value of investments | | 4,114,994 | | | 4,153,349 |
| Receivables: | | | | | |
| Interest | | 26,219 | | | 25,677 |
| Affiliates | | 6,998 | | | 6,095 |
| Total assets | | 4,148,211 | | | 4,185,121 |
| Liabilities: | | | | | |
| Payables: | | | | | |
| Transfer agent fees | | 11 | | | 8 |
| Reports to shareholders | | 2,207 | | | 2,576 |
| Professional fees | | 21,132 | | | 20,983 |
| Accrued expenses and other liabilities | | 30 | | | 30 |
| Total liabilities. | | 23,380 | | | 23,597 |
| Net assets, at value | $ | 4,124,831 | | $ | 4,161,524 |
| Net assets consist of: | | | | | |
| Paid-in capital | $ | 4,049,677 | | $ | 4,054,606 |
| Undistributed net investment income. | | 73,222 | | | 81,425 |
| Net unrealized appreciation (depreciation) | | 4,931 | | | 25,493 |
| Accumulated net realized gain (loss) | | (2,999 | ) | | — |
| Net assets, at value | $ | 4,124,831 | | $ | 4,161,524 |
| Class R6: | | | | | |
| Net assets, at value | $ | 2,062,394 | | $ | 2,080,746 |
| Shares outstanding | | 202,763 | | | 203,001 |
| Net asset value and maximum offering price per share | $ | 10.17 | | $ | 10.25 |
| Advisor Class: | | | | | |
| Net assets, at value | $ | 2,062,437 | | $ | 2,080,778 |
| Shares outstanding | | 202,763 | | | 203,001 |
| Net asset value and maximum offering price per share | $ | 10.17 | | $ | 10.25 |
| 52 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
| | | | | | | | | |
| | | FRANKLIN FUND ALLOCATOR SERIES | |
| | | | | | FINANCIAL STATEMENTS | |
| |
| |
| Statements of Operations | | | | | | | | | |
| for the six months ended November 30, 2016 (unaudited) | | | | | | | | | |
| |
| | | Franklin | | | Franklin | | | Franklin | |
| | | Payout 2017 | | | Payout 2018 | | | Payout 2019 | |
| | | Fund | | | Fund | | | Fund | |
| Investment income: | | | | | | | | | |
| Interest | $ | 25,495 | | $ | 30,507 | | $ | 43,551 | |
| Expenses: | | | | | | | | | |
| Management fees (Note 3a) | | 5,349 | | | 5,395 | | | 6,252 | |
| Transfer agent fees: (Note 3c) | | | | | | | | | |
| Class R6 | | 37 | | | 29 | | | 34 | |
| Advisor Class | | 3 | | | 16 | | | 14 | |
| Custodian fees (Note 4) | | 19 | | | 16 | | | 18 | |
| Reports to shareholders. | | 3,204 | | | 3,168 | | | 3,038 | |
| Registration and filing fees | | 9,388 | | | 9,307 | | | 9,309 | |
| Professional fees | | 21,252 | | | 21,690 | | | 21,808 | |
| Other | | 1,641 | | | 1,996 | | | 2,181 | |
| Total expenses | | 40,893 | | | 41,617 | | | 42,654 | |
| Expenses waived/paid by affiliates (Note 3d and 3e) | | (35,657 | ) | | (36,324 | ) | | (36,492 | ) |
| Net expenses | | 5,236 | | | 5,293 | | | 6,162 | |
| Net investment income | | 20,259 | | | 25,214 | | | 37,389 | |
| Realized and unrealized gains (losses): | | | | | | | | | |
| Net realized gain (loss) from investments | | — | | | 799 | | | — | |
| Net change in unrealized appreciation (depreciation) on investments. | | 932 | | | (9,458 | ) | | (22,303 | ) |
| Net realized and unrealized gain (loss) | | 932 | | | (8,659 | ) | | (22,303 | ) |
| Net increase (decrease) in net assets resulting from operations | $ | 21,191 | | $ | 16,555 | | $ | 15,086 | |
The accompanying notes are an integral part of these financial statements. | Semiannual Report 53
| | | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | | |
| FINANCIAL STATEMENTS | | | | | | |
| |
| |
| Statements of Operations (continued) | | | | | | |
| for the six months ended November 30, 2016 (unaudited) | | | | | | |
| |
| | | Franklin | | | Franklin | |
| | | Payout 2020 | | | Payout 2021 | |
| | | Fund | | | Fund | |
| Investment income: | | | | | | |
| Interest | $ | 48,079 | | $ | 52,637 | |
| Expenses: | | | | | | |
| Management fees (Note 3a) | | 6,290 | | | 6,390 | |
| Transfer agent fees: (Note 3c) | | | | | | |
| Class R6 | | 27 | | | 29 | |
| Advisor Class. | | 15 | | | 15 | |
| Custodian fees (Note 4) | | 18 | | | 18 | |
| Reports to shareholders | | 3,034 | | | 3,431 | |
| Registration and filing fees | | 9,308 | | | 9,313 | |
| Professional fees | | 21,808 | | | 21,734 | |
| Other | | 1,813 | | | 1,670 | |
| Total expenses | | 42,313 | | | 42,600 | |
| Expenses waived/paid by affiliates (Note 3d and 3e) | | (36,122 | ) | | (36,310 | ) |
| Net expenses. | | 6,191 | | | 6,290 | |
| Net investment income | | 41,888 | | | 46,347 | |
| Realized and unrealized gains (losses): | | | | | | |
| Net realized gain (loss) from investments | | — | | | — | |
| Net change in unrealized appreciation (depreciation) on investments | | (39,646 | ) | | (65,240 | ) |
| Net realized and unrealized gain (loss) | | (39,646 | ) | | (65,240 | ) |
| Net increase (decrease) in net assets resulting from operations | $ | 2,242 | | $ | (18,893 | ) |
| 54 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
| | | | | | | | | | | |
| | | | | FRANKLIN FUND ALLOCATOR SERIES | |
| | | | | | | | FINANCIAL STATEMENTS | |
| |
| |
| Statements of Changes in Net Assets | | | | | | | | | | | |
| |
| | | Franklin | | | | | Franklin | | | | |
| | | Payout 2017 Fund | | | Payout 2018 Fund | |
| | | Six Months Ended | | | | | Six Months Ended | | | | |
| | | November 30, 2016 | | Year Ended | | | November 30, 2016 | | | Year Ended | |
| | | (unaudited) | | May 31, 2016a | | | (unaudited) | | | May 31, 2016a | |
| Increase (decrease) in net assets: | | | | | | | | | | | |
| Operations: | | | | | | | | | | | |
| Net investment income | $ | 20,259 | $ | 39,226 | | $ | 25,214 | | $ | 48,909 | |
| Net realized gain (loss) | | — | | 593 | | | 799 | | | (223 | ) |
| Net change in unrealized appreciation | | | | | | | | | | | |
| (depreciation) | | 932 | | 218 | | | (9,458 | ) | | 13,396 | |
| Net increase (decrease) in net assets | | | | | | | | | | | |
| resulting from operations | | 21,191 | | 40,037 | | | 16,555 | | | 62,082 | |
| Distributions to shareholders from: | | | | | | | | | | | |
| Net investment income: | | | | | | | | | | | |
| Class R6 | | — | | (13,895 | ) | | — | | | (16,905 | ) |
| Advisor Class | | — | | (13,895 | ) | | — | | | (16,905 | ) |
| Total distributions to shareholders | | — | | (27,790 | ) | | — | | | (33,810 | ) |
| Capital share transactions: (Note 2) | | | | | | | | | | | |
| Class R6 | | — | | 1,763,895 | | | — | | | 1,766,905 | |
| Advisor Class | | — | | 1,763,895 | | | — | | | 1,766,905 | |
| Total capital share transactions | | — | | 3,527,790 | | | — | | | 3,533,810 | |
| Net increase (decrease) in net assets | | 21,191 | | 3,540,037 | | | 16,555 | | | 3,562,082 | |
| Net assets: | | | | | | | | | | | |
| Beginning of period | | 3,540,037 | | — | | | 3,562,082 | | | — | |
| End of period | $ | 3,561,228 | $ | 3,540,037 | | $ | 3,578,637 | | $ | 3,562,082 | |
| Undistributed net investment income included in net | | | | | | | | | | | |
| assets: | | | | | | | | | | | |
| End of period | $ | 36,177 | $ | 15,918 | | $ | 44,801 | | $ | 19,587 | |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
The accompanying notes are an integral part of these financial statements. | Semiannual Report 55
| | | | | | | | | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | | | | | | | | |
| FINANCIAL STATEMENTS | | | | | | | | | | | | |
| |
| |
| Statements of Changes in Net Assets (continued) | | | | | | | | | | |
| |
| | | Franklin | | | | | | Franklin | | | | |
| | | Payout 2019 Fund | | | Payout 2020 Fund | |
| | | Six Months Ended | | | | | | Six Months Ended | | | | |
| | | November 30, 2016 | | | Year Ended | | | November 30, 2016 | | | Year Ended | |
| | | (unaudited) | | | May 31, 2016a | | | (unaudited) | | | May 31, 2016a | |
| Increase (decrease) in net assets: | | | | | | | | | | | | |
| Operations: | | | | | | | | | | | | |
| Net investment income | $ | 37,389 | | $ | 72,589 | | $ | 41,888 | | $ | 81,011 | |
| Net realized gain (loss) | | — | | | 1,435 | | | — | | | (2,999 | ) |
| Net change in unrealized appreciation | | | | | | | | | | | | |
| (depreciation) | | (22,303 | ) | | 39,565 | | | (39,646 | ) | | 44,577 | |
| Net increase (decrease) in net assets | | | | | | | | | | | | |
| resulting from operations | | 15,086 | | | 113,589 | | | 2,242 | | | 122,589 | |
| Distributions to shareholders from: | | | | | | | | | | | | |
| Net investment income: | | | | | | | | | | | | |
| Class R6 | | — | | | (24,500 | ) | | — | | | (27,380 | ) |
| Advisor Class | | — | | | (24,500 | ) | | — | | | (27,380 | ) |
| Total distributions to shareholders | | — | | | (49,000 | ) | | — | | | (54,760 | ) |
| Capital share transactions: (Note 2) | | | | | | | | | | | | |
| Class R6 | | — | | | 2,024,500 | | | — | | | 2,027,380 | |
| Advisor Class | | — | | | 2,024,500 | | | — | | | 2,027,380 | |
| Total capital share transactions | | — | | | 4,049,000 | | | — | | | 4,054,760 | |
| Net increase (decrease) in net assets | | 15,086 | | | 4,113,589 | | | 2,242 | | | 4,122,589 | |
| Net assets: | | | | | | | | | | | | |
| Beginning of period | | 4,113,589 | | | — | | | 4,122,589 | | | — | |
| End of period | $ | 4,128,675 | | $ | 4,113,589 | | $ | 4,124,831 | | $ | 4,122,589 | |
| Undistributed net investment income included in net | | | | | | | | | | | | |
| assets: | | | | | | | | | | | | |
| End of period | $ | 66,079 | | $ | 28,690 | | $ | 73,222 | | $ | 31,334 | |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
| 56 | Semiannual Report | The accompanying notes are an integral part of these financial statements. |
| | | | | | |
| | | FRANKLIN FUND ALLOCATOR SERIES | |
| | | FINANCIAL STATEMENTS | |
| |
| |
| Statements of Changes in Net Assets (continued) | | | | | | |
| |
| | | Franklin | | | | |
| | | Payout 2021 Fund | |
| | | Six Months Ended | | | | |
| | | November 30, 2016 | | | Year Ended | |
| | | (unaudited) | | | May 31, 2016a | |
| Increase (decrease) in net assets: | | | | | | |
| Operations: | | | | | | |
| Net investment income | $ | 46,347 | | $ | 89,684 | |
| Net realized gain (loss) | | — | | | — | |
| Net change in unrealized appreciation (depreciation) | | (65,240 | ) | | 90,733 | |
| Net increase (decrease) in net assets resulting from operations | | (18,893 | ) | | 180,417 | |
| Distributions to shareholders from: | | | | | | |
| Net investment income: | | | | | | |
| Class R6 | | — | | | (29,860 | ) |
| Advisor Class | | — | | | (29,860 | ) |
| Total distributions to shareholders | | — | | | (59,720 | ) |
| Capital share transactions: (Note 2) | | | | | | |
| Class R6 | | — | | | 2,029,860 | |
| Advisor Class | | — | | | 2,029,860 | |
| Total capital share transactions | | — | | | 4,059,720 | |
| Net increase (decrease) in net assets | | (18,893 | ) | | 4,180,417 | |
| Net assets: | | | | | | |
| Beginning of period | | 4,180,417 | | | — | |
| End of period | $ | 4,161,524 | | $ | 4,180,417 | |
| Undistributed net investment income included in net assets: | | | | | | |
| End of period | $ | 81,425 | | $ | 35,078 | |
aFor the year June 1, 2015 (commencement of operations) to May 31, 2016.
The accompanying notes are an integral part of these financial statements. | Semiannual Report 57
FRANKLIN FUND ALLOCATOR SERIES
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Fund Allocator Series (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of twenty-two separate funds, five of which are included in this report (Funds) and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). The financial statements of the remaining funds in the Trust are presented separately. The Funds offer two classes of shares: Class R6 and Advisor Class. Each class of shares differs by its voting rights on matters affecting a single class and fees primarily due to differing arrangements for transfer agent fees.
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
The Funds’ investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Funds calculate the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Funds’ administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Funds’ valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Funds to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Funds’ pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value.
Investments in open-end mutual funds are valued at the closing NAV.
The Funds have procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
b. Income and Deferred 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.
The Funds may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which the Funds invest. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Funds invest. When a capital gain tax is
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
determined to apply, certain or all Funds record an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
Each Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of November 30, 2016, each Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
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. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. 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 U.S. GAAP. 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.
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 U.S. GAAP 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.
2. Shares of Beneficial Interest
At November 30, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Funds’ shares were as follows:
| | | | | | |
| | Franklin | Franklin |
| | Payout 2017 Funda, b | Payout 2018 Funda, b |
| | Shares | | Amount | Shares | | Amount |
| Class R6 Shares: | | | | | | |
| Year ended May 31, 2016 | | | | | | |
| Shares sold | 175,000 | $ | 1,750,000 | 175,000 | $ | 1,750,000 |
| Shares issued in reinvestment of distributions | 1,398 | | 13,895 | 1,701 | | 16,905 |
| Net increase (decrease) | 176,398 | $ | 1,763,895 | 176,701 | $ | 1,766,905 |
Semiannual Report 59
| | | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | | |
| NOTES TO FINANCIAL STATEMENTS (UNAUDITED) | | | | | | |
| |
| |
| |
| |
| 2. Shares of Beneficial Interest (continued) | | | | | | |
| |
| | Franklin | Franklin |
| | Payout 2017 Funda, b | Payout 2018 Funda, b |
| | Shares | | Amount | Shares | | Amount |
| Advisor Class Shares: | | | | | | |
| Year ended May 31, 2016 | | | | | | |
| Shares sold | 175,000 | $ | 1,750,000 | 175,000 | $ | 1,750,000 |
| Shares issued in reinvestment of distributions | 1,398 | | 13,895 | 1,701 | | 16,905 |
| Net increase (decrease) | 176,398 | $ | 1,763,895 | 176,701 | $ | 1,766,905 |
| |
| | Franklin | Franklin |
| | Payout 2019 Funda, b | Payout 2020 Funda, b |
| | Shares | | Amount | Shares | | Amount |
| Class R6 Shares: | | | | | | |
| Year ended May 31, 2016 | | | | | | |
| Shares sold | 200,000 | $ | 2,000,000 | 200,000 | $ | 2,000,000 |
| Shares issued in reinvestment of distributions | 2,465 | | 24,500 | 2,763 | | 27,380 |
| Net increase (decrease) | 202,465 | $ | 2,024,500 | 202,763 | $ | 2,027,380 |
| Advisor Class Shares: | | | | | | |
| Year ended May 31, 2016 | | | | | | |
| Shares sold | 200,000 | $ | 2,000,000 | 200,000 | $ | 2,000,000 |
| Shares issued in reinvestment of distributions | 2,465 | | 24,500 | 2,763 | | 27,380 |
| Net increase (decrease) | 202,465 | $ | 2,024,500 | 202,763 | $ | 2,027,380 |
| | | |
| | Franklin |
| | Payout 2021 Funda, b |
| | Shares | | Amount |
| Class R6 Shares: | | | |
| Year ended May 31, 2016 | | | |
| Shares sold | 200,000 | $ | 2,000,000 |
| Shares issued in reinvestment of distributions | 3,001 | | 29,860 |
| Net increase (decrease) | 203,001 | $ | 2,029,860 |
| Advisor Class Shares: | | | |
| Year ended May 31, 2016 | | | |
| Shares sold | 200,000 | $ | 2,000,000 |
| Shares issued in reinvestment of distributions | 3,001 | | 29,860 |
| Net increase (decrease) | 203,001 | $ | 2,029,860 |
aFor the period June 1, 2015 (commencement of operations) to May 31, 2016.
bDuring the period ended November 30, 2016, Class R6 and Advisor Class did not record any share transactions.
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 of the following subsidiaries:
| |
| Subsidiary | Affiliation |
| Franklin Advisers, Inc. (Advisers) | Investment manager |
| Franklin Templeton Services, LLC (FT Services) | Administrative manager |
| Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
| Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Funds pay an investment management fee to Advisers of 0.30% per year of the average daily net assets of each of the Funds.
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on each of the Funds’ average daily net assets, and is not an additional expense of the Funds.
c. Transfer Agent Fees
Advisor Class pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. Class R6 pays Investor Services transfer agent fees specific to that class.
For the period ended November 30, 2016, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services.
| | | | | | | | | | |
| | | Franklin | | Franklin | | Franklin | | Franklin | | Franklin |
| | | Payout 2017 | | Payout 2018 | | Payout 2019 | | Payout 2020 | | Payout 2021 |
| | | Fund | | Fund | | Fund | | Fund | | Fund |
| |
| Transfer agent fees | $ | 40 | $ | 42 | $ | 42 | $ | 42 | $ | 42 |
d. Investments in Affiliated Management Investment Companies
Certain or all Funds invest in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Funds are waived on assets invested in the affiliated management investment companies, as noted in the Statements of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. During the period ended November 30, 2016, certain or all Funds held investments in affiliated management investment companies as follows:
| | | | | | | | | | |
| | | | | | | | | | | % of |
| | | | | | | | | | | Affiliated |
| | Number of | | | | Number of | | | | | Fund Shares |
| | Shares Held | | | | Shares | | Value | | | Outstanding |
| | at Beginning | Gross | Gross | | Held at End | | at End | Investment | Realized | Held at End |
| | of Period | Additions | Reductions | | of Period | | of Period | Income | Gain (Loss) | of Period |
| |
| Franklin Payout 2017 Fund | | | | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | |
| Institutional Fiduciary Trust Money Market | | | | | | | | | | |
| Portfolio | 91,374 | 143,782 | (126,596 | ) | 108,560 | $ | 108,560 | $- | $- | –a |
Semiannual Report 61
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| 3. | Transactions with Affiliates (continued) |
| d. | Investments in Affiliated Management Investment Companies (continued) |
| | | | | | | | | | |
| | | | | | | | | | | % of |
| | | | | | | | | | | Affiliated |
| | Number of | | | | Number of | | | | | Fund Shares |
| | Shares Held | | | | Shares | | Value | | | Outstanding |
| | at Beginning | Gross | Gross | | Held at End | | at End | Investment | Realized | Held at End |
| | of Period | Additions | Reductions | | of Period | | of Period | Income | Gain (Loss) | of Period |
| Franklin Payout 2018 Fund | | | | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | |
| Institutional Fiduciary Trust Money Market | | | | | | | | | | |
| Portfolio | 39,351 | 264,174 | (184,337 | ) | 119,188 | $ | 119,188 | $- | $- | –a |
| Franklin Payout 2019 Fund | | | | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | |
| Institutional Fiduciary Trust Money Market | | | | | | | | | | |
| Portfolio | 51,192 | 151,306 | (81,392 | ) | 121,106 | $ | 121,106 | $- | $- | –a |
| Franklin Payout 2020 Fund | | | | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | |
| Institutional Fiduciary Trust Money Market | | | | | | | | | | |
| Portfolio | 86,725 | 158,815 | (132,358 | ) | 113,182 | $ | 113,182 | $- | $- | –a |
| Franklin Payout 2021 Fund | | | | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | |
| Institutional Fiduciary Trust Money Market | | | | | | | | | | |
| Portfolio | 48,291 | 161,996 | (80,290 | ) | 129,997 | $ | 129,997 | $- | $- | –a |
| |
| aRounds to less than 0.1% | | | | | | | | | | |
| |
| e. Waiver and Expense Reimbursements | | | | | | | | | |
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 expenses (excluding acquired fund fees and expense) for Advisor Class does not exceed 0.44%, and Class R6 does not exceed 0.30% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until September 30, 2017. Total expenses waived or paid are not subject to recapture subsequent to the Fund’s fiscal year end.
f. Other Affiliated Transactions
At November 30, 2016, Advisers owned 100% of the Fund’s outstanding shares. Investment activities of this shareholder could have a material impact on the Funds.
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 period ended November 30, 2016, there were no credits earned.
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
5. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains. At May 31, 2016, the capital loss carryforwards were as follows:
| | | | |
| | | Franklin | | Franklin |
| | | Payout 2018 | | Payout 2020 |
| | | Fund | | Fund |
| |
| Capital loss carryforwards: | | | | |
| Short term. | $ | 223 | $ | 2,999 |
At November 30, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
| | | | | | | | | | | | | | | |
| | | Franklin | | | Franklin | | | Franklin | | | Franklin | | | Franklin | |
| | | Payout 2017 | | | Payout 2018 | | | Payout 2019 | | | Payout 2020 | | | Payout 2021 | |
| | | Fund | | | Fund | | | Fund | | | Fund | | | Fund | |
| |
| Cost of investments | $ | 3,546,227 | | $ | 3,566,174 | | $ | 4,102,501 | | $ | 4,110,063 | | $ | 4,127,006 | |
| |
| Unrealized appreciation. | $ | 3,464 | | $ | 5,835 | | $ | 20,827 | | $ | 12,846 | | $ | 28,689 | |
| Unrealized depreciation. | | (1,764 | ) | | (1,846 | ) | | (3,351 | ) | | (7,915 | ) | | (2,346 | ) |
| Net unrealized appreciation | | | | | | | | | | | | | | | |
| (depreciation) | $ | 1,700 | | $ | 3,989 | | $ | 17,476 | | $ | 4,931 | | $ | 26,343 | |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of bond discount and premiums.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the period ended November 30, 2016, were as follows:
| | | | | | | | | | |
| | | Franklin | | Franklin | | Franklin | | Franklin | | Franklin |
| | | Payout 2017 | | Payout 2018 | | Payout 2019 | | Payout 2020 | | Payout 2021 |
| | | Fund | | Fund | | Fund | | Fund | | Fund |
| |
| Purchases | $ | 50,426 | $ | 101,205 | $ | — | $ | — | $ | — |
| Sales | $ | — | $ | 112,842 | $ | — | $ | — | $ | — |
7. Credit Facility
Certain or all 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 $2 billion (Global Credit Facility) which matures on February 10, 2017. 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 their relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.15% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses in the Statements of Operations. During the period ended November 30, 2016, the Funds did not use the Global Credit Facility.
Semiannual Report 63
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
8. 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’ financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of financial instruments)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
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.
A summary of inputs used as of November 30, 2016, in valuing the Funds’ assets carried at fair value, is as follows:
| | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Franklin Payout 2017 Fund | | | | | | | | |
| Assets: | | | | | | | | |
| Investments in Securities: | | | | | | | | |
| Corporate Bonds | $ | — | $ | 2,805,428 | $ | — | $ | 2,805,428 |
| U.S. Government and Agency Securities | | — | | 483,709 | | — | | 483,709 |
| Asset-Backed Securities. | | — | | 100,167 | | — | | 100,167 |
| Municipal Bonds | | — | | 50,063 | | — | | 50,063 |
| Short Term Investments | | 108,560 | | — | | — | | 108,560 |
| Total Investments in Securities | $ | 108,560 | $ | 3,439,367 | $ | — | $ | 3,547,927 |
| |
| Franklin Payout 2018 Fund | | | | | | | | |
| Assets: | | | | | | | | |
| Investments in Securities: | | | | | | | | |
| Corporate Bonds | $ | — | $ | 2,836,237 | $ | — | $ | 2,836,237 |
| U.S. Government and Agency Securities | | — | | 614,738 | | — | | 614,738 |
| Short Term Investments | | 119,188 | | — | | — | | 119,188 |
| Total Investments in Securities | $ | 119,188 | $ | 3,450,975 | $ | — | $ | 3,570,163 |
| |
| Franklin Payout 2019 Fund | | | | | | | | |
| Assets: | | | | | | | | |
| Investments in Securities: | | | | | | | | |
| Corporate Bonds | $ | — | $ | 3,271,169 | $ | — | $ | 3,271,169 |
| U.S. Government and Agency Securities | | — | | 727,702 | | — | | 727,702 |
| Short Term Investments | | 121,106 | | — | | — | | 121,106 |
| Total Investments in Securities | $ | 121,106 | $ | 3,998,871 | $ | — | $ | 4,119,977 |
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Franklin Payout 2020 Fund | | | | | | | | |
| Assets: | | | | | | | | |
| Investments in Securities: | | | | | | | | |
| Corporate Bonds | $ | — | $ | 3,082,774 | $ | — | $ | 3,082,774 |
| Foreign Government and Agency Securities | | — | | 202,359 | | — | | 202,359 |
| U.S. Government and Agency Securities | | — | | 716,679 | | — | | 716,679 |
| Short Term Investments | | 113,182 | | — | | — | | 113,182 |
| Total Investments in Securities | $ | 113,182 | $ | 4,001,812 | $ | — | $ | 4,114,994 |
| |
| Franklin Payout 2021 Fund | | | | | | | | |
| Assets: | | | | | | | | |
| Investments in Securities: | | | | | | | | |
| Corporate Bonds | $ | — | $ | 3,080,881 | $ | — | $ | 3,080,881 |
| Foreign Government and Agency Securities | | — | | 99,824 | | — | | 99,824 |
| U.S. Government and Agency Securities | | — | | 727,405 | | — | | 727,405 |
| Municipal Bonds | | — | | 115,242 | | — | | 115,242 |
| Short Term Investments | | 129,997 | | — | | — | | 129,997 |
| Total Investments in Securities | $ | 129,997 | $ | 4,023,352 | $ | — | $ | 4,153,349 |
9. 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.
| |
| Abbreviations |
| |
| Selected Portfolio |
| FFCB | Federal Farm Credit Bank |
| FHLB | Federal Home Loan Bank |
| FNMA | Federal National Mortgage Association |
| GO | General Obligation |
Semiannual Report 65
FRANKLIN 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, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, 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.
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| |
| Contents | |
| |
| Semiannual Report | |
| Economic and Market Overview | 2 |
| Franklin NextStep Conservative Fund | 3 |
| Franklin NextStep Moderate Fund | 8 |
| Franklin NextStep Growth Fund | 14 |
| Financial Highlights and Statements of Investments | 20 |
| Financial Statements | 32 |
| Notes to Financial Statements | 37 |
| Shareholder Information | 45 |
Semiannual Report
Economic and Market Overview
The global economy expanded during the six months under review. In this environment, global developed and emerging market stocks, as measured by the MSCI All Country World Index, rose. Global markets were aided by accommodative monetary policies of various global central banks, an improvement in commodity prices, generally encouraging economic data across regions, expectations of higher interest rates and inflation in the U.S. driven by hopes of expansionary fiscal policies under new president-elect Donald Trump, and an Organization of the Petroleum Exporting Countries deal to curb oil production. However, the impact of these factors was partially offset by global economic concerns, the U.K.’s historic referendum to leave the European Union (also known as “Brexit”), uncertainty about the U.S. Federal Reserve’s (Fed’s) timing for raising interest rates and worries about the health of European banks.
The U.S. economy strengthened during the six months under review. The economy grew at a faster pace in 2016’s third quarter compared to the second quarter, mainly due to personal consumption expenditure, exports, private inventory investment, federal government spending and nonresidential fixed investment. Although the Fed kept its target interest rate unchanged during the review period, and lowered its forecast for 2016 U.S. economic growth at the September meeting, it maintained its stance that the case for a U.S. interest rate increase has strengthened. Further, the Fed Chair Janet Yellen, at her testimony to the Congress’ Joint Economic Committee in November, set the stage for an interest rate hike in December, as long as data continue to provide evidence of economic resilience.
In Europe, the U.K.’s economy moderated in the third quarter, supported by growth in services. Immediate effects of the Brexit vote in June materialized as U.K. stocks declined significantly, the pound sterling hit a three-decade low amid intensified selling and the U.K.’s credit rating was downgraded. In the eurozone, despite investors’ concerns about banking sector weakness, low corporate earnings and post-Brexit political repercussions, some regions benefited due to rising consumer spending, resulting from a cheaper euro, low inflation and signs of sustained economic growth. The eurozone’s economic growth held steady in the third quarter from the second quarter, while the region’s annual inflation rate rose to its highest level since April 2014 toward period-end. The European Central Bank cut its benchmark interest rate and expanded its massive bond-buying program in August 2016 to boost the region’s slowing growth.
In Asia, Japan’s economic growth slowed in the second quarter compared to the first quarter, amid falling exports and weak corporate investment. However, the Japanese economy grew significantly in the third quarter, largely due to a rise in exports. After announcing additional monetary easing measures in July, the Bank of Japan, at its September meeting, overhauled its monetary stimulus program to adjust Japanese government bond purchases with the aim of keeping the 10-year rate near the current level of 0%.
In emerging markets, economic growth generally moderated during the review period. Brazil’s economy continued to be in recession, with third-quarter gross domestic product declining faster than in the previous quarter. The pace of contraction had slowed in 2016’s second quarter, as business sentiment improved near the end of August with the expected impeachment of President Dilma Rousseff. Russia’s economic contraction continued to ease in 2016’s third quarter. The Bank of Russia reduced its key interest rates in June and September in an attempt to revive its economy. China’s economy grew at a stable rate in 2016’s third quarter, and remained within the government’s targeted range. The People’s Bank of China weakened its currency during the review period as the U.S. dollar strengthened. Elsewhere, India’s economic growth marginally increased from July to September due to slower private consumption growth and increasing government spending. Overall, emerging market stocks, as measured by the MSCI Emerging Markets Index, rose for the review period.
The foregoing information reflects our analysis and opinions as of November 30, 2016. 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.
2 Semiannual Report
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Franklin NextStep Conservative Fund
This semiannual report for Franklin NextStep Conservative Fund covers the period ended November 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks the highest level of long-term total return consistent with a conservative level of risk.1 As a “fund of funds,” it seeks to achieve its investment goal by investing its assets in underlying funds (i.e., other mutual funds and exchange-traded funds (ETFs)) managed by Franklin Templeton as well as those managed by unaffiliated investment managers. Under normal market conditions, we allocate the Fund’s assets among the broad asset classes of equity and debt investments by investing primarily in a distinctly weighted combination of underlying funds, based on each underlying fund’s predominant asset class. These underlying funds, in turn, invest in a variety of U.S. and foreign equity, debt and derivative investments.
Performance Overview
The Fund’s Class A shares delivered a +0.33% cumulative total return for the six months under review. In comparison, the Fund’s blended benchmark, which is 60% Bloomberg Barclays U.S. Aggregate Bond Index, 15% Bloomberg Barclays Multiverse ex USD Index (Hedged to U.S. Dollar), 15% Standard & Poor’s 500® Index (S&P 500®) and 10% MSCI All Country World Index (ACWI) ex USA, generated a +0.56% total return.2 You can find more of the Fund’s performance data in the Performance Summary beginning on page 5.
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 nextstepfunds.com or call (800) 342-5236.
Investment Strategy
The Fund seeks to maintain a target exposure, principally through investment in underlying funds, of 25% to equities and equity-related securities and 75% to debt securities. The Fund’s asset allocation may change from time to time and deviate from its target exposure based on market conditions and our strategic
*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 conditions.
and tactical asset allocation views. However, the Fund’s equity and debt investments will typically be in the 10%–30% and 70%–90% range, respectively. The risk profile of underlying funds will be considered when determining allocations. The Fund may also invest directly in securities of each asset class and may use currency forwards for hedging purposes.
What is a currency forward contract?
A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
Risk control will be an integral part of the Fund’s investment process. Among other things, we will analyze portfolio volatility, portfolio concentration, expected extreme events and expected instability in returns among various asset classes and types of investments. When selecting equity funds, we consider the underlying funds’ foreign and domestic exposure, market capitalization ranges and investment style (growth vs. value). When selecting debt funds, we focus primarily on maximizing income appropriate to the Fund’s risk profile and consider the overall credit quality, duration and maturity of the underlying funds’ portfolios.
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.
2. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sale charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.
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 23.
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Semiannual Report 3
FRANKLIN NEXTSTEP CONSERVATIVE FUND
What is duration?
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
| | |
| Top 10 Fund Holdings | | |
| 11/30/16 | | |
| | % of Total | |
| | Net Assets | |
| iShares Core U.S. Aggregate Bond ETF | 19.0 | % |
| Delaware Corporate Bond Fund – Class I | 14.6 | % |
| Templeton Global Total Return Fund – Class R6 | 9.3 | % |
| Franklin Strategic Income Fund – Class R6 | 8.4 | % |
| iShares 7-10 Year Treasury Bond ETF | 8.4 | % |
| Delaware Value Fund – Class I | 5.7 | % |
| iShares TIPS Bond ETF | 5.6 | % |
| Vanguard Total International Bond ETF | 5.0 | % |
| Franklin Focused Core Equity Fund – Class R6 | 4.5 | % |
| Van Eck Emerging Markets Fund – Class I | 2.6 | % |
Manager’s Discussion
The Fund’s performance can be attributed to our allocation among equities and fixed income securities and to the performance of the underlying funds we selected for investment.
On November 30, 2016, the portfolio was diversified across capitalization sizes, regions and investment styles for both the equity and fixed income allocations. At period-end, Franklin NextStep Conservative Fund allocated 70.2% of total net assets to fixed income and 20.6% to equity. Domestic fixed income exposure was 79.8% of the total fixed income weighting, with the balance represented by foreign fixed income. iShares Core U.S. Aggregate Bond ETF, at 19.0% of the Fund’s total net assets, was our largest fixed income weighting at period-end. On the equity side, domestic exposure was 61.7% of the Fund’s total equity weighting, with the balance represented by foreign equity. Delaware Value Fund – Class I, was our largest equity weighting at period-end with 5.7% of the Fund’s total net assets.
During the reporting period, our largest domestic fixed income fund holding, iShares Core U.S. Aggregate Bond ETF, underperformed the Bloomberg Barclays U.S. Aggregate Bond Index, while our largest global fixed income fund holding, Templeton Global Total Return Fund – Class R6 outperformed the Bloomberg Barclays Multiverse ex USD Index (Hedged to U.S. Dollar). On the equity side, our largest equity fund
holding, Delaware Value Fund – Class I, underperformed the S&P 500, while our largest foreign equity fund holding, Van Eck Emerging Markets Fund – Class I, underperformed the MSCI ACWI ex USA.
Thank you for your participation in Franklin NextStep Conservative Fund. We look forward to serving your future investment needs.
Thomas A. Nelson, CFA
Stephen R. Lingard, CFA
John G. Levy, CFA
Brooks Ritchey
Portfolio Management Team
The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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FRANKLIN NEXTSTEP CONSERVATIVE FUND
Performance Summary as of November 30, 2016
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Performance as of 11/30/161
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit nextstepfunds.com.
| | | | |
| | Cumulative | | Average Annual | |
| Share Class | Total Return2 | | Total Return3 | |
| A | | | | |
| 6-Month | +0.33 | % | -5.47 | % |
| Since Inception (2/5/16) | +4.61 | % | -1.41 | % |
| Advisor4 | | | | |
| 6-Month | +0.50 | % | +0.50 | % |
| Since Inception (6/15/16) | +4.78 | % | +4.78 | % |
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 nextstepfunds.com or call (800) 342-5236.
See page 6 for Performance Summary footnotes.
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Semiannual Report 5
| | | | |
| FRANKLIN NEXTSTEP CONSERVATIVE FUND | | | |
| PERFORMANCE SUMMARY | | | | |
| |
| Total Annual Operating Expenses5 | | | |
| Share Class | With Waiver | | Without Waiver | |
| A | 1.06 | % | 23.82 | % |
| Advisor4 | 0.81 | % | 23.57 | % |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
While an asset allocation plan can be a valuable tool to help reduce overall volatility, all investments involve risks, including possible loss of principal. Because
the Fund invests in underlying funds, which may engage in a variety of investment strategies involving certain risks, the Fund is subject to those same risks. In
addition, the Fund’s shareholders will indirectly bear the fees and expenses of the underlying funds. The risks described herein are the principal risks of the Fund
and the underlying funds. Typically, the more aggressive the investment, or the greater the potential return, the more risk involved. Generally, investors should be
comfortable with some fluctuation in the value of their investments, especially over the short term. Stock prices fluctuate, sometimes rapidly and dramatically, due
to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of
interest rates. Thus, as prices of bonds in a fund adjust to a rise in interest rates, that fund’s share price may decline. Foreign investing carries additional risks
such as currency and market volatility and political or social instability, risks which are heightened in developing countries. Investments in derivatives involve
costs and create economic leverage, which may result in significant volatility and cause the funds to participate in losses (as well as gains) that significantly
exceed the funds’ initial investment. These risks are described in the Fund’s prospectus. Investors should consult their financial advisor for help selecting the
appropriate fund of funds, or fund combination, based on an evaluation of their investment objectives and risk tolerance. The Fund is actively managed but there
is no guarantee that the manager’s investment decisions will produce the desired results.
1. The Fund has an expense reduction contractually guaranteed through 9/30/17. The Fund also has a fee waiver associated with any investments it makes in a Franklin
Templeton money fund and/or other Franklin Templeton fund, as applicable, contractually guaranteed through its current fiscal year-end. Fund investment results reflect the
expense reduction and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the period indicated.
3. Average annual total return represents the average annual change in value of an investment over the period indicated. Return for less than one year, if any, has not been
annualized.
4. Effective 6/15/16, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the
following methods of calculation: (a) For periods prior to 6/15/16, a restated figure is used based upon the Fund’s Class A performance, excluding the effect of Class A’s
maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 6/15/16, actual Advisor Class performance is used reflecting all
charges and fees applicable to that class. Since 6/15/16 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were + 0.41% and
+0.41%.
5. Figures are as stated in the Fund’s current prospectus, including the effect of acquired fund fees and expenses, and may differ from the expense ratios disclosed in the Your
Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses
to become higher than the figures shown.
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FRANKLIN NEXTSTEP CONSERVATIVE FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) 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 table below 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 table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. 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): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
| | | | | | | | | | | | |
| | | | | Actual | | | | Hypothetical | | |
| | | | | (actual return after expenses) | | (5% annual return before expenses) | | |
| |
| | | | | | | | | | | Expenses | Net | |
| | | Beginning | | Ending | | Expenses | | Ending | | Paid During | Annualized | |
| Share | | Account | | Account | | Paid During | | Account | | Period | Expense | |
| Class | | Value1 | | Value 11/30/16 | | Period2,3,4 | | Value 11/30/16 | | 6/1/16–11/30/163,4 | Ratio4 | |
| |
| A | $ | 1,000 | $ | 1,003.30 | $ | 3.01 | $ | 1,022.06 | $ | 3.04 | 0.60 | % |
| C | $ | 1,000 | $ | 1,000.20 | $ | 6.77 | $ | 1,018.30 | $ | 6.83 | 1.35 | % |
| Advisor | $ | 1,000 | $ | 1,005.00 | $ | 1.61 | $ | 1,021.40 | $ | 1.63 | 0.35 | % |
1. For Classes A and C, 6/1/16 for Actual and Hypothetical. For Advisor Class, 6/15/16 for Actual and 6/1/16 for Hypothetical.
2. For Classes A and C, 6/1/16-11/30/16. For Advisor Class, 6/15/16-11/30/16.
3. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value
over the period indicated, and then multiplied by 183/365 to reflect the one-half year period. The multiplier is 168/365 for Actual Advisor Class expenses to reflect the number
of days since inception.
4. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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Semiannual Report 7
Franklin NextStep Moderate Fund
This semiannual report for Franklin NextStep Moderate Fund covers the period ended November 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks the highest level of long-term total return consistent with a moderate level of risk.1 As a “fund of funds,” it seeks to achieve its investment goal by investing its assets in underlying funds (i.e., other mutual funds and exchange-traded funds (ETFs)) managed by Franklin Templeton as well as those managed by unaffiliated investment managers. Under normal market conditions, we allocate the Fund’s assets among the broad asset classes of equity, debt and alternative investments by investing primarily in a distinctly weighted combination of underlying funds, based on each underlying fund’s predominant asset class. These underlying funds, in turn, invest in a variety of U.S. and foreign equity, debt and derivative investments.
Performance Overview
The Fund’s Class A shares delivered a cumulative total return of +1.28% for the six months under review. In comparison, the Fund’s blended benchmark, which is 35% Standard & Poor’s 500 Index (S&P 500), 25% MSCI All Country World Index (ACWI) ex USA, 25% Bloomberg Barclays U.S. Aggregate Bond Index and 15% Bloomberg Barclays Multiverse ex USD Index (Hedged to U.S. Dollar), generated a +2.33% total return.2 You can find more of the Fund’s performance data in the Performance Summary beginning on page 11.
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 nextstepfunds.com or call (800) 342-5236.
Investment Strategy
The Fund seeks to maintain a target exposure, principally through investment in underlying funds, of 60% to equities and equity-related securities and 40% to debt securities. The Fund may also invest up to 5% in alternative investment funds. The Fund’s asset allocation may change from time to time and
*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 conditions.
deviate from its target exposure based on market conditions and our strategic and tactical asset allocation views. However, the Fund’s equity, debt and alternative investments will typically be in the 45%–65%, 35%–55% and 0%–5% range, respectively. The risk profile of underlying funds will be considered when determining allocations. The Fund may also invest directly in securities of each asset class and may use currency forwards for hedging purposes.
What is a currency forward contract?
A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
Risk control will be an integral part of the Fund’s investment process. Among other things, we will analyze portfolio volatility, portfolio concentration, expected extreme events and expected instability in returns among various asset classes and types of investments. When selecting equity funds, we consider the underlying funds’ foreign and domestic exposure, market
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.
2. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sale charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.
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 27.
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FRANKLIN NEXTSTEP MODERATE FUND
| | |
| Top 10 Fund Holdings | | |
| 11/30/16 | | |
| | % of Total | |
| | Net Assets | |
| Delaware Value Fund – Class I | 9.3 | % |
| Franklin Focused Core Equity Fund – Class R6 | 7.7 | % |
| iShares Core S&P 500 ETF | 7.6 | % |
| Templeton Global Total Return Fund – Class R6 | 7.2 | % |
| iShares Core U.S. Aggregate Bond ETF | 6.9 | % |
| Delaware Corporate Bond Fund – Class I | 6.4 | % |
| iShares 7-10 Year Treasury Bond ETF | 5.9 | % |
| Van Eck Emerging Markets Fund – Class I | 4.8 | % |
| Vanguard Total International Bond ETF | 4.7 | % |
| iShares MSCI Japan ETF | 4.6 | % |
capitalization ranges and investment style (growth vs. value). When selecting debt funds, we focus primarily on maximizing income appropriate to the Fund’s risk profile and consider the overall credit quality, duration and maturity of the underlying funds’ portfolios. When selecting alternative investment funds, we focus primarily on the specific alternative strategy employed by the fund; how the fund generates alpha (a measurement of how well the fund performed compared to a benchmark index); how the fund is expected to correlate to different markets; the strategies, methods and techniques the underlying fund uses to hedge certain markets or investments; and how a fund’s net asset value typically reduces when the market falls (the lower correlation between these two factors, the better).
What is duration?
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
Manager’s Discussion
The Fund’s performance can be attributed mainly to our allocation among equities and fixed income securities and to the performance of the underlying funds we selected for investment.
On November 30, 2016, the portfolio was diversified across capitalization sizes, regions and investment styles for both the equity and fixed income allocations. At period-end, Franklin NextStep Moderate Fund allocated 51.7% of total net assets to equity, 37.7% to fixed income and 3.9% to alternative strategies. Domestic equity exposure was 59.4% of the total equity weighting, with the balance represented by foreign equity. Delaware Value Fund – Class I, at 9.3% of the total net assets, was our largest equity weighting at period-end. On the fixed income side, domestic exposure was 68.2% of the Fund’s total fixed income weighting, with the balance represented by foreign fixed income. Templeton Global Total Return Fund –Class R6, at 7.2% of the Fund’s total net assets, was our largest fixed income weighting at period-end.
During the reporting period, our largest domestic equity fund holding, Delaware Value Fund – Class I, underperformed the S&P 500, while our largest foreign equity fund, Van Eck Emerging Markets Fund – Class I, underperformed the MSCI ACWI ex USA. On the fixed income side, our largest domestic fixed income fund holding, iShares Core U.S. Aggregate Bond ETF, underperformed the Bloomberg Barclays U.S. Aggregate Bond Index, and our largest global fixed income fund holding, Templeton Global Total Return Fund – Class R6, outperformed the Bloomberg Barclays Multiverse ex USD (Hedged to U.S. Dollar).
Thank you for your participation in Franklin NextStep Moderate Fund. We look forward to serving your future investment needs.
nextstepfunds.com
Semiannual Report 9
FRANKLIN NEXTSTEP MODERATE FUND
The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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FRANKLIN NEXTSTEP MODERATE FUND
Performance Summary as of November 30, 2016
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Performance as of 11/30/161
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit nextstepfunds.com.
| | | | |
| | Cumulative | | Average Annual | |
| Share Class | Total Return2 | | Total Return3 | |
| A | | | | |
| 6-Month | +1.28 | % | -4.55 | % |
| Since Inception (2/5/16) | +9.40 | % | +3.11 | % |
| Advisor4 | | | | |
| 6-Month | +1.45 | % | +1.45 | % |
| Since Inception (6/15/16) | +9.59 | % | +9.59 | % |
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 nextstepfunds.com or call (800) 342-5236.
See page 6 for Performance Summary footnotes.
nextstepfunds.com
Semiannual Report 11
| | | | |
| FRANKLIN NEXTSTEP MODERATE FUND | | | |
| PERFORMANCE SUMMARY | | | | |
| |
| Total Annual Operating Expenses5 | | | |
| Share Class | With Waiver | | Without Waiver | |
| A | 1.15 | % | 6.63 | % |
| Advisor4 | 0.90 | % | 6.38 | % |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
While an asset allocation plan can be a valuable tool to help reduce overall volatility, all investments involve risks, including possible loss of principal. Because
the Fund invests in underlying funds, which may engage in a variety of investment strategies involving certain risks, the Fund is subject to those same risks. In
addition, the Fund’s shareholders will indirectly bear the fees and expenses of the underlying funds. The risks described herein are the principal risks of the Fund
and the underlying funds. Typically, the more aggressive the investment, or the greater the potential return, the more risk involved. Generally, investors should be
comfortable with some fluctuation in the value of their investments, especially over the short term. Stock prices fluctuate, sometimes rapidly and dramatically, due
to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of
interest rates. Thus, as prices of bonds in a fund adjust to a rise in interest rates, that fund’s share price may decline. Foreign investing carries additional risks
such as currency and market volatility and political or social instability, risks which are heightened in developing countries. Investments in derivatives involve
costs and create economic leverage, which may result in significant volatility and cause the funds to participate in losses (as well as gains) that significantly
exceed the funds’ initial investment. These risks are described in the Fund’s prospectus. Investors should consult their financial advisor for help selecting the
appropriate fund of funds, or fund combination, based on an evaluation of their investment objectives and risk tolerance. The Fund is actively managed but there
is no guarantee that the manager’s investment decisions will produce the desired results.
1. The Fund has an expense reduction contractually guaranteed through 9/30/17. The Fund also has a fee waiver associated with any investments it makes in a Franklin
Templeton money fund and/or other Franklin Templeton fund, as applicable, contractually guaranteed through its current fiscal year-end. Fund investment results reflect the
expense reduction and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the period indicated.
3. Average annual total return represents the average annual change in value of an investment over the period indicated. Return for less than one year, if any, has not been
annualized.
4. Effective 6/15/16, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the
following methods of calculation: (a) For periods prior to 6/15/16, a restated figure is used based upon the Fund’s Class A performance, excluding the effect of Class A’s
maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 6/15/16, actual Advisor Class performance is used reflecting all
charges and fees applicable to that class. Since 6/15/16 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +2.30% and
+2.30%.
5. Figures are as stated in the Fund’s current prospectus, including the effect of acquired fund fees and expenses, and may differ from the expense ratios disclosed in the Your
Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses
to become higher than the figures shown.
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FRANKLIN NEXTSTEP MODERATE FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) 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 table below 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 table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. 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): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
| | | | | | | | | | | | |
| | | | | Actual | | | | Hypothetical | | |
| | | | | (actual return after expenses) | | (5% annual return before expenses) | | |
| |
| | | | | | | | | | | Expenses | Net | |
| | | Beginning | | Ending | | Expenses | | Ending | | Paid During | Annualized | |
| Share | | Account | | Account | | Paid During | | Account | | Period | Expense | |
| Class | | Value1 | | Value 11/30/16 | | Period2,3,4 | | Value 11/30/16 | | 6/1/16–11/30/163,4 | Ratio4 | |
| |
| A | $ | 1,000 | $ | 1,012.80 | $ | 3.03 | $ | 1,022.06 | $ | 3.04 | 0.60 | % |
| C | $ | 1,000 | $ | 1,008.60 | $ | 6.80 | $ | 1,018.30 | $ | 6.83 | 1.35 | % |
| Advisor | $ | 1,000 | $ | 1,014.50 | $ | 1.62 | $ | 1,021.40 | $ | 1.63 | 0.35 | % |
1. For Classes A and C, 6/1/16 for Actual and Hypothetical. For Advisor Class, 6/15/16 for Actual and 6/1/16 for Hypothetical.
2. For Classes A and C, 6/1/16-11/30/16. For Advisor Class, 6/15/16-11/30/16.
3. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value
over the period indicated, and then multiplied by 183/365 to reflect the one-half year period. The multiplier is 168/365 for Actual Advisor Class expenses to reflect the number
of days since inception.
4. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
nextstepfunds.com
Semiannual Report 13
Franklin NextStep Growth Fund
This semiannual report for Franklin NextStep Growth Fund covers the period ended November 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks the highest level of long-term total return consistent with a growth-oriented level of risk.1 As a “fund of funds,” it seeks to achieve its investment goal by investing its assets in underlying funds (i.e., other mutual funds and exchange-traded funds (ETFs)) managed by Franklin Templeton as well as those managed by unaffiliated investment managers. Under normal market conditions, we allocate the Fund’s assets among the broad asset classes of equity, debt and alternative investments by investing primarily in a distinctly weighted combination of underlying funds, based on each underlying fund’s predominant asset class. These underlying funds, in turn, invest in a variety of U.S. and foreign equity, debt and derivative investments.
Performance Overview
The Fund’s Class A shares delivered a cumulative total return of +1.29% for the six months under review. In comparison, the Fund’s blended benchmark, which is 45% Standard & Poor’s 500 Index (S&P 500), 30% MSCI All Country World Index (ACWI) ex USA, 15% Barclays U.S. Aggregate Bond Index and 10% Barclays Multiverse ex USD Index (Hedged to U.S. Dollar), generated a +3.09% total return.2 You can find more of the Fund’s performance data in the Performance Summary beginning on page 17.
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 nextstepfunds.com or call (800) 342-5236.
Investment Strategy
The Fund seeks to maintain a target exposure, principally through investment in underlying funds, of 75% to equities and equity-related securities and 25% to debt securities. The Fund may also invest up to 10% in alternative investment funds. The Fund’s asset allocation may change from time to time and
*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 conditions.
deviate from its target exposure based on market conditions and our strategic and tactical asset allocation views. However, the Fund’s equity, debt and alternative investments will typically be in the 60%–80%, 20%–40% and 0%–10% range, respectively. The risk profile of underlying funds will be considered when determining allocations. The Fund may also invest directly in securities of each asset class and may use currency forwards for hedging purposes.
What is a currency forward contract?
A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
Risk control will be an integral part of the Fund’s investment process. Among other things, we will analyze portfolio volatility, portfolio concentration, expected extreme events and expected instability in returns among various asset classes and types of investments. When selecting equity funds, we consider the underlying funds’ foreign and domestic exposure, market capitalization ranges and investment style (growth vs. value).
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.
2. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sale charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.
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 31.
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FRANKLIN NEXTSTEP GROWTH FUND
| | |
| Top 10 Fund Holdings | | |
| 11/30/16 | | |
| | % of Total | |
| | Net Assets | |
| Franklin Focused Core Equity Fund – Class R6 | 10.1 | % |
| Delaware Value Fund – Class I | 10.1 | % |
| iShares Core S&P 500 ETF | 10.0 | % |
| iShares 7-10 Year Treasury Bond ETF | 8.0 | % |
| Van Eck Emerging Markets Fund – Class I | 6.8 | % |
| Pioneer Fundamental Growth Fund – Class K | 5.9 | % |
| iShares MSCI Japan ETF | 5.6 | % |
| Columbia European Equity Fund – | 4.6 | % |
| Franklin Mutual European Fund – Class R6 | 4.6 | % |
| Templeton Global Total Return Fund – Class R6 | 4.1 | % |
When selecting debt funds, we focus primarily on maximizing income appropriate to the Fund’s risk profile and consider the overall credit quality, duration and maturity of the underlying funds’ portfolios. When selecting alternative investment funds, we focus primarily on the specific alternative strategy employed by the fund; how the fund generates alpha (a measurement of how well the fund performed compared to a benchmark index); how the fund is expected to correlate to different markets; the strategies, methods and techniques the underlying fund uses to hedge certain markets or investments; and how a fund’s net asset value typically reduces when the market falls (the lower correlation between these two factors, the better).
What is duration?
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
Manager’s Discussion
The Fund’s performance can be attributed mainly to our allocation among equities and fixed income securities and to the performance of the underlying funds we selected for investment.
On November 30, 2016, the portfolio was diversified across capitalization sizes, regions and investment styles for both the equity and fixed income allocations. At period-end, Franklin NextStep Growth Fund allocated 65.5% of total net assets to equity, 23.5% to fixed income and 3.9% to alternative strategies. Domestic equity exposure was 61.2% of the total equity weighting, with the balance represented by foreign equity. Franklin Focused Core Equity Fund – Class R6 was our largest equity weighting at period-end with 10.1% of total net assets. On the fixed income side, domestic exposure was 68.5% of the Fund’s total fixed income weighting, with the balance represented by foreign fixed income. iShares 7-10 Year Treasury Bond ETF, representing 8.0% of the Fund’s total net assets, was our largest fixed income weighting at period-end.
During the reporting period, our largest domestic equity fund holding, Franklin Focused Core Equity Fund – Class R6, outperformed the S&P 500, while our largest foreign equity fund, Van Eck Emerging Markets Fund – Class I, underperformed the MSCI ACWI ex USA. On the fixed income side, our largest domestic fixed income fund holding, iShares 7-10 Year Treasury Bond ETF, underperformed the Bloomberg Barclays U.S. Aggregate Bond Index, and our largest global fixed income fund holding, Templeton Global Total Return Fund – Class R6, outperformed the Bloomberg Barclays Multiverse ex USD (Hedged to U.S. Dollar).
Thank you for your participation in Franklin NextStep Growth Fund. We look forward to serving your future investment needs.
nextstepfunds.com
Semiannual Report 15
FRANKLIN NEXTSTEP GROWTH FUND
The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
16 Semiannual Report
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FRANKLIN NEXTSTEP GROWTH FUND
Performance Summary as of November 30, 2016
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Performance as of 11/30/161
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit nextstepfunds.com.
| | | | |
| | Cumulative | | Average Annual | |
| Share Class | Total Return2 | | Total Return3 | |
| A | | | | |
| 6-Month | +1.29 | % | -4.51 | % |
| Since Inception (2/5/16) | +10.21 | % | +3.88 | % |
| Advisor4 | | | | |
| 6-Month | +1.38 | % | +1.38 | % |
| Since Inception (6/15/16) | +10.31 | % | +10.31 | % |
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 nextstepfunds.com or call (800) 342-5236.
See page 6 for Performance Summary footnotes.
nextstepfunds.com
Semiannual Report 17
| | | | |
| FRANKLIN NEXTSTEP GROWTH FUND | | | |
| PERFORMANCE SUMMARY | | | | |
| |
| Total Annual Operating Expenses5 | | | |
| Share Class | With Waiver | | Without Waiver | |
| A | 1.20 | % | 17.75 | % |
| Advisor4 | 0.95 | % | 17.50 | % |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
While an asset allocation plan can be a valuable tool to help reduce overall volatility, all investments involve risks, including possible loss of principal. Because
the Fund invests in underlying funds, which may engage in a variety of investment strategies involving certain risks, the Fund is subject to those same risks. In
addition, the Fund’s shareholders will indirectly bear the fees and expenses of the underlying funds. The risks described herein are the principal risks of the Fund
and the underlying funds. Typically, the more aggressive the investment, or the greater the potential return, the more risk involved. Generally, investors should be
comfortable with some fluctuation in the value of their investments, especially over the short term. Stock prices fluctuate, sometimes rapidly and dramatically, due
to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of
interest rates. Thus, as prices of bonds in a fund adjust to a rise in interest rates, that fund’s share price may decline. Foreign investing carries additional risks
such as currency and market volatility and political or social instability, risks which are heightened in developing countries. Investments in derivatives involve
costs and create economic leverage, which may result in significant volatility and cause the funds to participate in losses (as well as gains) that significantly
exceed the funds’ initial investment. These risks are described in the Fund’s prospectus. Investors should consult their financial advisor for help selecting the
appropriate fund of funds, or fund combination, based on an evaluation of their investment objectives and risk tolerance. The Fund is actively managed but there
is no guarantee that the manager’s investment decisions will produce the desired results.
1. The Fund has an expense reduction contractually guaranteed through 9/30/17. The Fund also has a fee waiver associated with any investments it makes in a Franklin
Templeton money fund and/or other Franklin Templeton fund, as applicable, contractually guaranteed through its current fiscal year-end. Fund investment results reflect the
expense reduction and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the period indicated.
3. Average annual total return represents the average annual change in value of an investment over the period indicated. Return for less than one year, if any, has not been
annualized.
4. Effective 6/15/16, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the
following methods of calculation: (a) For periods prior to 6/15/16, a restated figure is used based upon the Fund’s Class A performance, excluding the effect of Class A’s
maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 6/15/16, actual Advisor Class performance is used reflecting all
charges and fees applicable to that class. Since 6/15/16 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +2.70% and
+2.70%.
5. Figures are as stated in the Fund’s current prospectus, including the effect of acquired fund fees and expenses, and may differ from the expense ratios disclosed in the Your
Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses
to become higher than the figures shown.
18 Semiannual Report
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FRANKLIN NEXTSTEP GROWTH FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) 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 table below 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 table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. 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): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
| | | | | | | | | | | | |
| | | | | Actual | | | | Hypothetical | | |
| | | | | (actual return after expenses) | | (5% annual return before expenses) | | |
| |
| | | | | | | | | | | Expenses | Net | |
| | | Beginning | | Ending | | Expenses | | Ending | | Paid During | Annualized | |
| Share | | Account | | Account | | Paid During | | Account | | Period | Expense | |
| Class | | Value1 | | Value 11/30/16 | | Period2,3,4 | | Value 11/30/16 | | 6/1/16–11/30/163,4 | Ratio4 | |
| |
| A | $ | 1,000 | $ | 1,012.90 | $ | 3.03 | $ | 1,022.06 | $ | 3.04 | 0.60 | % |
| C | $ | 1,000 | $ | 1,009.20 | $ | 6.80 | $ | 1,018.30 | $ | 6.83 | 1.35 | % |
| Advisor | $ | 1,000 | $ | 1,027.00 | $ | 1.63 | $ | 1,023.31 | $ | 1.78 | 0.35 | % |
1. For Classes A and C, 6/1/16 for Actual and Hypothetical. For Advisor Class, 6/15/16 for Actual and 6/1/16 for Hypothetical.
2. For Classes A and C, 6/1/16-11/30/16. For Advisor Class, 6/15/16-11/30/16.
3. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value
over the period indicated, and then multiplied by 183/365 to reflect the one-half year period. The multiplier is 168/365 for Actual Advisor Class expenses to reflect the number
of days since inception.
4. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
nextstepfunds.com
Semiannual Report 19
FRANKLIN FUND ALLOCATOR SERIES
| | | | | | |
| Financial Highlights | | | | | | |
| Franklin NextStep Conservative Fund | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class A | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.42 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec,d | | 0.06 | | | 0.03 | |
| Net realized and unrealized gains (losses) | | (0.02 | ) | | 0.40 | |
| Total from investment operations | | 0.04 | | | 0.43 | |
| Less distributions from net investment income. | | (0.04 | ) | | (0.01 | ) |
| Net asset value, end of period | $ | 10.42 | | $ | 10.42 | |
| |
| Total returne | | 0.33 | % | | 4.26 | % |
| |
| Ratios to average net assetsf | | | | | | |
| Expenses before waiver and payments by affiliatesg | | 6.32 | % | | 23.36 | % |
| Expenses net of waiver and payments by affiliatesg | | 0.60 | % | | 0.60 | % |
| Net investment incomed | | 1.07 | % | | 0.84 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 950 | | $ | 549 | |
| Portfolio turnover rate. | | 32.78 | % | | 23.45 | % |
aFor the period February 5, 2016 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds and exchange traded funds inwhichthe
Fund invests.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
fRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
gDoes not include expenses of the Underlying Funds and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds
and exchange traded funds was 0.42% for the period ended November 30, 2016.
20 Semiannual Report | The accompanying notes are an integral part of these financial statements. nextstepfunds.com
| | | | | | |
| | | FRANKLIN FUND ALLOCATOR SERIES | |
| | | FINANCIAL HIGHLIGHTS | |
| |
| |
| Franklin NextStep Conservative Fund (continued) | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class C | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.39 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec,d | | 0.02 | | | —e | |
| Net realized and unrealized gains (losses) | | (0.02 | ) | | 0.40 | |
| Total from investment operations | | — | | | 0.40 | |
| Less distributions from net investment income. | | (0.02 | ) | | (0.01 | ) |
| Net asset value, end of period | $ | 10.37 | | $ | 10.39 | |
| |
| Total returnf | | 0.02 | % | | 3.96 | % |
| |
| Ratios to average net assetsg | | | | | | |
| Expenses before waiver and payments by affiliatesh | | 7.07 | % | | 24.11 | % |
| Expenses net of waiver and payments by affiliatesh | | 1.35 | % | | 1.35 | % |
| Net investment incomed | | 0.32 | % | | 0.09 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 2,352 | | $ | 373 | |
| Portfolio turnover rate. | | 32.78 | % | | 23.45 | % |
aFor the period February 5, 2016 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds and exchange traded funds inwhichthe
Fund invests.
eAmount rounds to less than $0.01 per share.
fTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
gRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
hDoes not include expenses of the Underlying Funds and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds
and exchange traded funds was 0.42% for the period ended November 30, 2016.
nextstepfunds.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 21
| | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | |
| FINANCIAL HIGHLIGHTS | | | |
| |
| |
| Franklin NextStep Conservative Fund (continued) | | | |
| | | Period Ended | |
| | | November 30, 2016a | |
| | | (unaudited) | |
| Advisor Class | | | |
| Per share operating performance | | | |
| (for a share outstanding throughout the period) | | | |
| Net asset value, beginning of period | $ | 10.43 | |
| Income from investment operationsb: | | | |
| Net investment incomec,d | | 0.07 | |
| Net realized and unrealized gains (losses) | | (0.03 | ) |
| Total from investment operations | | 0.04 | |
| Less distributions from net investment income | | (0.04 | ) |
| Net asset value, end of period | $ | 10.43 | |
| |
| Total returne | | 0.41 | % |
| |
| Ratios to average net assetsf | | | |
| Expenses before waiver and payments by affiliatesg | | 6.07 | % |
| Expenses net of waiver and payments by affiliatesg | | 0.35 | % |
| Net investment incomed | | 1.32 | % |
| |
| Supplemental data | | | |
| Net assets, end of period (000’s) | $ | 5 | |
| Portfolio turnover rate | | 32.78 | % |
aFor the period June 15, 2016 (effective date) to November 30, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds and exchange traded funds inwhichthe
Fund invests.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
gDoes not include expenses of the Underlying Funds and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds
and exchange traded funds was 0.42% for the period ended November 30, 2016.
22 Semiannual Report | The accompanying notes are an integral part of these financial statements. nextstepfunds.com
FRANKLIN FUND ALLOCATOR SERIES
| | | |
| Statement of Investments, November 30, 2016 (unaudited) | | | |
| Franklin NextStep Conservative Fund | | | |
| | Shares | | Value |
| |
| Investments in Underlying Funds and Exchange Traded Funds 90.8% | | | |
| Domestic Equity 12.7% | | | |
| Delaware Value Fund, Class I | 9,708 | $ | 189,894 |
| a Franklin Focused Core Equity Fund, Class R6 | 10,204 | | 147,445 |
| iShares Core S&P 500 ETF | 189 | | 41,869 |
| Pioneer Fundamental Growth Fund, Class K | 2,143 | | 40,767 |
| | | | 419,975 |
| Domestic Fixed Income 56.0% | | | |
| Delaware Corporate Bond Fund, Class I | 85,371 | | 483,203 |
| a Franklin Strategic Income Fund, Class R6 | 29,205 | | 278,322 |
| iShares 7-10 Year Treasury Bond ETF | 2,628 | | 276,624 |
| iShares Core U.S. Aggregate Bond ETF | 5,809 | | 628,766 |
| iShares TIPS Bond ETF | 1,631 | | 185,053 |
| | | | 1,851,968 |
| Foreign Equity 7.9% | | | |
| Columbia European Equity Fund, Class Z | 11,368 | | 65,932 |
| a Franklin Mutual European Fund, Class R6 | 2,903 | | 54,020 |
| iShares MSCI Japan ETF (Japan) | 1,100 | | 54,879 |
| Van Eck Emerging Markets Fund, Class I | 6,433 | | 84,917 |
| | | | 259,748 |
| Foreign Fixed Income 14.2% | | | |
| a Templeton Global Total Return Fund, Class R6 | 26,141 | | 306,373 |
| Vanguard Total International Bond ETF | 3,010 | | 164,135 |
| | | | 470,508 |
| Total Investments in Underlying Funds and Exchange Traded Funds | | | |
| before Short Term Investments (Cost $3,028,093) | | | 3,002,199 |
| |
| |
| Short Term Investments (Cost $225,752) 6.8% | | | |
| Money Market Funds 6.8% | | | |
| a,b Institutional Fiduciary Trust Money Market Portfolio | 225,752 | | 225,752 |
| Total Investments in Underlying Funds and Exchange Traded Funds | | | |
| (Cost $3,253,845) 97.6% | | | 3,227,951 |
| Other Assets, less Liabilities 2.4%. | | | 78,925 |
| Net Assets 100.0% | | $ | 3,306,876 |
See Abbreviations on page 44.
aSee Note 3(f) regarding investments in FT Underlying Funds.
bNon-income producing.
nextstepfunds.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 23
FRANKLIN FUND ALLOCATOR SERIES
| | | | | | |
| Financial Highlights | | | | | | |
| Franklin NextStep Moderate Fund | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class A | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.80 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec,d | | 0.04 | | | 0.01 | |
| Net realized and unrealized gains (losses) | | 0.10 | | | 0.79 | |
| Total from investment operations | | 0.14 | | | 0.80 | |
| Less distributions from net investment income. | | (0.03 | ) | | (—)e | |
| Net asset value, end of period | $ | 10.91 | | $ | 10.80 | |
| |
| Total returnf | | 1.28 | % | | 8.02 | % |
| |
| Ratios to average net assetsg | | | | | | |
| Expenses before waiver and payments by affiliatesh | | 2.10 | % | | 6.08 | % |
| Expenses net of waiver and payments by affiliatesh | | 0.60 | % | | 0.60 | % |
| Net investment incomed | | 0.75 | % | | 0.34 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 5,600 | | $ | 3,280 | |
| Portfolio turnover rate. | | 25.78 | % | | 13.45 | % |
aFor the period February 5, 2016 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds and exchange traded funds inwhichthe
Fund invests.
eAmount rounds to less than $0.01 per share.
fTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
gRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
hDoes not include expenses of the Underlying Funds and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds
and exchange traded funds was 0.55% for the period ended November 30, 2016.
24 Semiannual Report | The accompanying notes are an integral part of these financial statements. nextstepfunds.com
| | | | | | |
| | | FRANKLIN FUND ALLOCATOR SERIES | |
| | | FINANCIAL HIGHLIGHTS | |
| |
| |
| Franklin NextStep Moderate Fund (continued) | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class C | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.78 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment income (loss)c,d | | (—)e | | | (0.02 | ) |
| Net realized and unrealized gains (losses) | | 0.09 | | | 0.80 | |
| Total from investment operations | | 0.09 | | | 0.78 | |
| Less distributions from net investment income. | | (0.01 | ) | | (—)e | |
| Net asset value, end of period | $ | 10.86 | | $ | 10.78 | |
| |
| Total returnf | | 0.86 | % | | 7.82 | % |
| |
| Ratios to average net assetsg | | | | | | |
| Expenses before waiver and payments by affiliatesh | | 2.85 | % | | 6.83 | % |
| Expenses net of waiver and payments by affiliatesh | | 1.35 | % | | 1.35 | % |
| Net investment income (loss)d | | (—)%i | | | (0.41 | )% |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 4,933 | | $ | 1,369 | |
| Portfolio turnover rate. | | 25.78 | % | | 13.45 | % |
aFor the period February 5, 2016 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds and exchange traded funds inwhichthe
Fund invests.
eAmount rounds to less than $0.01 per share.
fTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
gRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
hDoes not include expenses of the Underlying Funds and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds
and exchange traded funds was 0.55% for the period ended November 30, 2016.
iRounds to less than 0.01%.
nextstepfunds.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 25
| | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | |
| FINANCIAL HIGHLIGHTS | | | |
| |
| |
| Franklin NextStep Moderate Fund (continued) | | | |
| | | Period Ended | |
| | | November 30, 2016a | |
| | | (unaudited) | |
| Advisor Class | | | |
| Per share operating performance | | | |
| (for a share outstanding throughout the period) | | | |
| Net asset value, beginning of period | $ | 10.71 | |
| Income from investment operationsb: | | | |
| Net investment incomec,d | | 0.03 | |
| Net realized and unrealized gains (losses) | | 0.22 | |
| Total from investment operations | | 0.25 | |
| Less distributions from net investment income | | (0.04 | ) |
| Net asset value, end of period | $ | 10.92 | |
| |
| Total returne | | 2.30 | % |
| |
| Ratios to average net assetsf | | | |
| Expenses before waiver and payments by affiliatesg | | 1.85 | % |
| Expenses net of waiver and payments by affiliatesg | | 0.35 | % |
| Net investment incomed | | 1.00 | % |
| |
| Supplemental data | | | |
| Net assets, end of period (000’s) | $ | 80 | |
| Portfolio turnover rate | | 25.78 | % |
aFor the period June 15, 2016 (effective date) to November 30, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds and exchange traded funds inwhichthe
Fund invests.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
gDoes not include expenses of the Underlying Funds and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds
and exchange traded funds was 0.55% for the period ended November 30, 2016.
26 Semiannual Report | The accompanying notes are an integral part of these financial statements. nextstepfunds.com
FRANKLIN FUND ALLOCATOR SERIES
Statement of Investments, November 30, 2016 (unaudited)
Franklin NextStep Moderate Fund
| | | |
| | Shares | | Value |
| |
| Investments in Underlying Funds and Exchange Traded Funds 93.3% | | | |
| Alternative Strategies 3.9% | | | |
| a Franklin K2 Alternative Strategies Fund, Class R6 | 38,953 | $ | 420,693 |
| Domestic Equity 30.7% | | | |
| Delaware Value Fund, Class I | 50,202 | | 981,945 |
| a Franklin Focused Core Equity Fund, Class R6 | 56,656 | | 818,680 |
| a,b Franklin Small Cap Growth Fund, Class R6 | 8,060 | | 161,693 |
| iShares Core S&P 500 ETF | 3,655 | | 809,692 |
| Pioneer Fundamental Growth Fund, Class K | 25,394 | | 482,996 |
| | | | 3,255,006 |
| Domestic Fixed Income 25.7% | | | |
| Delaware Corporate Bond Fund, Class I | 120,358 | | 681,224 |
| a Franklin Strategic Income Fund, Class R6 | 43,051 | | 410,279 |
| iShares 7-10 Year Treasury Bond ETF | 5,936 | | 624,823 |
| iShares Core U.S. Aggregate Bond ETF | 6,794 | | 735,383 |
| iShares TIPS Bond ETF | 2,405 | | 272,871 |
| | | | 2,724,580 |
| Foreign Equity 21.0% | | | |
| Columbia European Equity Fund, Class Z | 69,146 | | 401,047 |
| a Franklin Mutual European Fund, Class R6 | 21,543 | | 400,909 |
| iShares Core MSCI Emerging Markets ETF | 5,067 | | 219,249 |
| iShares MSCI Eurozone ETF | 6,145 | | 201,433 |
| iShares MSCI Japan ETF (Japan) | 9,889 | | 493,362 |
| Van Eck Emerging Markets Fund, Class I | 38,601 | | 509,537 |
| | | | 2,225,537 |
| Foreign Fixed Income 12.0% | | | |
| a Templeton Global Total Return Fund, Class R6 | 65,558 | | 768,338 |
| Vanguard Total International Bond ETF | 9,227 | | 503,148 |
| | | | 1,271,486 |
| Total Investments in Underlying Funds and Exchange Traded Funds | | | |
| before Short Term Investments (Cost $9,757,813) | | | 9,897,302 |
| |
| |
| Short Term Investments (Cost $638,982) 6.0% | | | |
| Money Market Funds 6.0% | | | |
| a,b Institutional Fiduciary Trust Money Market Portfolio | 638,982 | | 638,982 |
| Total Investments in Underlying Funds and Exchange Traded Funds | | | |
| (Cost $10,396,795) 99.3% | | | 10,536,284 |
| Other Assets, less Liabilities 0.7% | | | 77,084 |
| Net Assets 100.0% | | $ | 10,613,368 |
See Abbreviations on page 44.
aSee Note 3(f) regarding investments in FT Underlying Funds.
bNon-income producing.
nextstepfunds.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 27
FRANKLIN FUND ALLOCATOR SERIES
| | | | | | |
| Financial Highlights | | | | | | |
| Franklin NextStep Growth Fund | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class A | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.88 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment incomec,d | | 0.03 | | | —e | |
| Net realized and unrealized gains (losses) | | 0.11 | | | 0.88 | |
| Total from investment operations | | 0.14 | | | 0.88 | |
| Less distributions from net investment income. | | — | | | (—)e | |
| Net asset value, end of period | $ | 11.02 | | $ | 10.88 | |
| |
| Total returnf | | 1.29 | % | | 8.81 | % |
| |
| Ratios to average net assetsg | | | | | | |
| Expenses before waiver and payments by affiliatesh | | 4.71 | % | | 17.15 | % |
| Expenses net of waiver and payments by affiliatesh | | 0.60 | % | | 0.60 | % |
| Net investment incomed | | 0.47 | % | | 0.07 | % |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 2,559 | | $ | 1,129 | |
| Portfolio turnover rate. | | 39.56 | % | | 24.56 | % |
aFor the period February 5, 2016 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds and exchange traded funds inwhichthe
Fund invests.
eAmount rounds to less than $0.01 per share.
fTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
gRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
hDoes not include expenses of the Underlying Funds and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds
and exchange traded funds was 0.61% for the period ended November 30, 2016.
28 Semiannual Report | The accompanying notes are an integral part of these financial statements. nextstepfunds.com
| | | | | | |
| | | FRANKLIN FUND ALLOCATOR SERIES | |
| | | FINANCIAL HIGHLIGHTS | |
| |
| |
| Franklin NextStep Growth Fund (continued) | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | November 30, 2016 | | | May 31, | |
| | | (unaudited) | | | 2016 | a |
| Class C | | | | | | |
| Per share operating performance | | | | | | |
| (for a share outstanding throughout the period) | | | | | | |
| Net asset value, beginning of period | $ | 10.86 | | $ | 10.00 | |
| Income from investment operationsb: | | | | | | |
| Net investment income (loss)c,d | | (0.02 | ) | | (0.02 | ) |
| Net realized and unrealized gains (losses) | | 0.12 | | | 0.88 | |
| Total from investment operations | | 0.10 | | | 0.86 | |
| Less distributions from net investment income. | | — | | | (—)e | |
| Net asset value, end of period | $ | 10.96 | | $ | 10.86 | |
| |
| Total returnf | | 0.92 | % | | 8.61 | % |
| |
| Ratios to average net assetsg | | | | | | |
| Expenses before waiver and payments by affiliatesh | | 5.46 | % | | 17.90 | % |
| Expenses net of waiver and payments by affiliatesh | | 1.35 | % | | 1.35 | % |
| Net investment income (loss)d | | (0.28 | )% | | (0.68 | )% |
| |
| Supplemental data | | | | | | |
| Net assets, end of period (000’s) | $ | 1,542 | | $ | 661 | |
| Portfolio turnover rate. | | 39.56 | % | | 24.56 | % |
aFor the period February 5, 2016 (commencement of operations) to May 31, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds and exchange traded funds inwhichthe
Fund invests.
eAmount rounds to less than $0.01 per share.
fTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
gRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
hDoes not include expenses of the Underlying Funds and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds
and exchange traded funds was 0.61% for the period ended November 30, 2016.
nextstepfunds.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 29
| | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | |
| FINANCIAL HIGHLIGHTS | | | |
| |
| |
| Franklin NextStep Growth Fund (continued) | | | |
| | | Period Ended | |
| | | November 30, 2016a | |
| | | (unaudited) | |
| Advisor Class | | | |
| Per share operating performance | | | |
| (for a share outstanding throughout the period) | | | |
| Net asset value, beginning of period | $ | 10.75 | |
| Income from investment operationsb: | | | |
| Net investment incomec,d | | 0.04 | |
| Net realized and unrealized gains (losses) | | 0.25 | |
| Total from investment operations | | 0.29 | |
| Net asset value, end of period | $ | 11.04 | |
| |
| Total returne | | 2.70 | % |
| |
| Ratios to average net assetsf | | | |
| Expenses before waiver and payments by affiliatesg | | 4.46 | % |
| Expenses net of waiver and payments by affiliatesg | | 0.35 | % |
| Net investment incomed | | 0.72 | % |
| |
| Supplemental data | | | |
| Net assets, end of period (000’s) | $ | 5 | |
| Portfolio turnover rate | | 39.56 | % |
aFor the period June 15, 2016 (effective date) to November 30, 2016.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds and exchange traded funds inwhichthe
Fund invests.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
gDoes not include expenses of the Underlying Funds and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds
and exchange traded funds was 0.61% for the period ended November 30, 2016.
30 Semiannual Report | The accompanying notes are an integral part of these financial statements. nextstepfunds.com
FRANKLIN FUND ALLOCATOR SERIES
Statement of Investments, November 30, 2016 (unaudited)
Franklin NextStep Growth Fund
| | | |
| | Shares | | Value |
| |
| Investments in Underlying Funds and Exchange Traded Funds 92.9% | | | |
| Alternative Strategies 3.9% | | | |
| a Franklin K2 Alternative Strategies Fund, Class R6 | 14,846 | $ | 160,335 |
| Domestic Equity 40.1% | | | |
| Delaware Value Fund, Class I | 21,193 | | 414,537 |
| a Franklin Focused Core Equity Fund, Class R6 | 28,793 | | 416,058 |
| a,b Franklin Small Cap Growth Fund, Class R6 | 8,147 | | 163,433 |
| iShares Core S&P 500 ETF | 1,860 | | 412,046 |
| Pioneer Fundamental Growth Fund, Class K | 12,694 | | 241,438 |
| | | | 1,647,512 |
| Domestic Fixed Income 16.1% | | | |
| Delaware Corporate Bond Fund, Class I | 29,214 | | 165,349 |
| iShares 7-10 Year Treasury Bond ETF | 3,129 | | 329,359 |
| iShares Core U.S. Aggregate Bond ETF | 1,525 | | 165,066 |
| | | | 659,774 |
| Foreign Equity 25.4% | | | |
| Columbia European Equity Fund, Class Z | 32,455 | | 188,240 |
| a Franklin Mutual European Fund, Class R6 | 10,077 | | 187,528 |
| iShares Core MSCI Emerging Markets ETF | 1,604 | | 69,405 |
| iShares MSCI Eurozone ETF | 2,874 | | 94,210 |
| iShares MSCI Japan ETF (Japan) | 4,585 | | 228,746 |
| Van Eck Emerging Markets Fund, Class I | 21,025 | | 277,534 |
| | | | 1,045,663 |
| Foreign Fixed Income 7.4% | | | |
| a Templeton Global Total Return Fund, Class R6 | 14,317 | | 167,801 |
| Vanguard Total International Bond ETF | 2,485 | | 135,507 |
| | | | 303,308 |
| Total Investments in Underlying Funds and Exchange Traded Funds | | | |
| before Short Term Investments (Cost $3,740,209) | | | 3,816,592 |
| |
| |
| Short Term Investments (Cost $229,250) 5.6% | | | |
| Money Market Funds 5.6% | | | |
| a,b Institutional Fiduciary Trust Money Market Portfolio | 229,250 | | 229,250 |
| Total Investments in Underlying Funds and Exchange Traded Funds | | | |
| (Cost $3,969,459) 98.5% | | | 4,045,842 |
| Other Assets, less Liabilities 1.5%. | | | 59,832 |
| Net Assets 100.0% | | $ | 4,105,674 |
See Abbreviations on page 44.
aSee Note 3(f) regarding investments in FT Underlying Funds.
bNon-income producing.
nextstepfunds.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 31
| | | | | | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | | | | | |
| |
| |
| |
| |
| Financial Statements | | | | | | | | | |
| |
| |
| Statements of Assets and Liabilities | | | | | | | | | |
| November 30, 2016 (unaudited) | | | | | | | | | |
| |
| | | Franklin | | | Franklin | | | Franklin | |
| | | NextStep | | | NextStep | | | NextStep | |
| | | Conservative | | | Moderate | | | Growth | |
| | | Fund | | | Fund | | | Fund | |
| Assets: | | | | | | | | | |
| Investments in securities: | | | | | | | | | |
| Cost - Unaffiliated issuers | $ | 874,722 | | $ | 2,404,277 | | $ | 1,276,759 | |
| Cost - Non-controlled affiliates (Note 3f) | | 993,703 | | | 4,151,840 | | | 1,269,838 | |
| Cost - Exchange traded funds | | 1,385,420 | | | 3,840,678 | | | 1,422,862 | |
| Total cost of investments | $ | 3,253,845 | | $ | 10,396,795 | | $ | 3,969,459 | |
| Value - Unaffiliated issuers | $ | 864,713 | | $ | 3,056,749 | | $ | 1,287,098 | |
| Value - Non-controlled affiliates (Note 3f) | | 1,011,912 | | | 3,619,574 | | | 1,324,405 | |
| Value - Exchange traded funds | | 1,351,326 | | | 3,859,961 | | | 1,434,339 | |
| Total value of investments | | 3,227,951 | | | 10,536,284 | | | 4,045,842 | |
| Receivables: | | | | | | | | | |
| Investment securities sold | | — | | | 1,442 | | | — | |
| Capital shares sold | | — | | | 36,732 | | | 1,420 | |
| Dividends. | | 783 | | | 9,062 | | | 4,526 | |
| Affiliates | | 86,472 | | | 78,441 | | | 85,543 | |
| Offering costs | | 20,622 | | | 20,622 | | | 20,622 | |
| Total assets | | 3,335,828 | | | 10,682,583 | | | 4,157,953 | |
| Liabilities: | | | | | | | | | |
| Payables: | | | | | | | | | |
| Investment securities purchased | | — | | | 44,138 | | | 28,265 | |
| Distribution fees | | 2,014 | | | 4,962 | | | 1,691 | |
| Transfer agent fees | | 117 | | | 303 | | | 23 | |
| Reports to shareholders | | 2,072 | | | — | | | 1,034 | |
| Professional fees | | 6,389 | | | 7,151 | | | 6,405 | |
| Accrued expenses and other liabilities. | | 18,360 | | | 12,661 | | | 14,861 | |
| Total liabilities | | 28,952 | | | 69,215 | | | 52,279 | |
| Net assets, at value | $ | 3,306,876 | | $ | 10,613,368 | | $ | 4,105,674 | |
| Net assets consist of: | | | | | | | | | |
| Paid-in capital | $ | 3,325,982 | | $ | 10,474,455 | | $ | 4,034,787 | |
| Undistributed net investment income | | 2,691 | | | 3,991 | | | 3,429 | |
| Net unrealized appreciation (depreciation) | | (25,894 | ) | | 139,489 | | | 76,383 | |
| Accumulated net realized gain (loss) | | 4,097 | | | (4,567 | ) | | (8,925 | ) |
| Net assets, at value | $ | 3,306,876 | | $ | 10,613,368 | | $ | 4,105,674 | |
32 Semiannual Report | The accompanying notes are an integral part of these financial statements. nextstepfunds.com
| | | | | | |
| | | FRANKLIN FUND ALLOCATOR SERIES |
| | | | | FINANCIAL STATEMENTS |
| |
| |
| Statements of Assets and Liabilities (continued) | | | | | | |
| November 30, 2016 (unaudited) | | | | | | |
| |
| | | Franklin | | Franklin | | Franklin |
| | | NextStep | | NextStep | | NextStep |
| | | Conservative | | Moderate | | Growth |
| | | Fund | | Fund | | Fund |
| Class A: | | | | | | |
| Net assets, at value | $ | 949,809 | $ | 5,600,204 | $ | 2,558,791 |
| Shares outstanding. | | 91,124 | | 513,220 | | 232,197 |
| Net asset value per sharea | $ | 10.42 | $ | 10.91 | $ | 11.02 |
| Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 11.06 | $ | 11.58 | $ | 11.69 |
| Class C: | | | | | | |
| Net assets, at value | $ | 2,351,781 | $ | 4,933,134 | $ | 1,541,751 |
| Shares outstanding. | | 226,818 | | 454,169 | | 140,685 |
| Net asset value and maximum offering price per sharea | $ | 10.37 | $ | 10.86 | $ | 10.96 |
| Advisor Class: | | | | | | |
| Net assets, at value | $ | 5,286 | $ | 80,030 | $ | 5,132 |
| Shares outstanding. | | 507 | | 7,327 | | 465 |
| Net asset value and maximum offering price per share | $ | 10.43 | $ | 10.92 | $ | 11.04 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
nextstepfunds.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 33
| | | | | | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | | | | | |
| FINANCIAL STATEMENTS | | | | | | | | | |
| |
| |
| Statements of Operations | | | | | | | | | |
| for the six months ended November 30, 2016 (unaudited) | | | | | | | | | |
| |
| | | Franklin | | | Franklin | | | Franklin | |
| | | NextStep | | | NextStep | | | NextStep | |
| | | Conservative | | | Moderate | | | Growth | |
| | | Fund | | | Fund | | | Fund | |
| Investment income: | | | | | | | | | |
| Dividends: | | | | | | | | | |
| Unaffiliated issuers | $ | 6,158 | | $ | 17,309 | | $ | 5,628 | |
| Non-controlled affiliates (Note 3f) | | 4,572 | | | 12,036 | | | 1,940 | |
| Exchange traded funds | | 7,019 | | | 24,809 | | | 8,351 | |
| Total investment income. | | 17,749 | | | 54,154 | | | 15,919 | |
| Expenses: | | | | | | | | | |
| Management fees (Note 3a) | | 2,651 | | | 9,974 | | | 3,708 | |
| Distribution fees: (Note 3c) | | | | | | | | | |
| Class A | | 971 | | | 5,700 | | | 2,357 | |
| Class C | | 6,730 | | | 17,070 | | | 5,388 | |
| Transfer agent fees: (Note 3e) | | | | | | | | | |
| Class A | | 168 | | | 962 | | | 691 | |
| Class C | | 292 | | | 721 | | | 395 | |
| Advisor Class | | 1 | | | 3 | | | 2 | |
| Custodian fees (Note 4) | | 40 | | | 100 | | | 57 | |
| Reports to shareholders | | 3,019 | | | 3,474 | | | 2,810 | |
| Registration and filing fees | | 16,666 | | | 16,827 | | | 16,643 | |
| Professional fees | | 13,358 | | | 13,703 | | | 13,546 | |
| Amortization of offering costs | | 56,324 | | | 56,324 | | | 56,324 | |
| Other. | | 343 | | | 348 | | | 290 | |
| Total expenses | | 100,563 | | | 125,206 | | | 102,211 | |
| Expenses waived/paid by affiliates (Note 3g) | | (89,124 | ) | | (88,415 | ) | | (89,251 | ) |
| Net expenses | | 11,439 | | | 36,791 | | | 12,960 | |
| Net investment income | | 6,310 | | | 17,363 | | | 2,959 | |
| Realized and unrealized gains (losses): | | | | | | | | | |
| Net realized gain (loss) from: | | | | | | | | | |
| Sale of Investments: | | | | | | | | | |
| Unaffiliated issuers | | (2,228 | ) | | (21,794 | ) | | (11,455 | ) |
| Non-controlled affiliates (Note 3f) | | 5,574 | | | 14,141 | | | 2,234 | |
| Exchange traded funds. | | (697 | ) | | (7,984 | ) | | (4,127 | ) |
| Realized gain distributions: | | | | | | | | | |
| Unaffiliated issuers | | 783 | | | 9,061 | | | 4,525 | |
| Non-controlled affiliates (Note 3f) | | 439 | | | 4,213 | | | 1,883 | |
| Net realized gain (loss) | | 3,871 | | | (2,363 | ) | | (6,940 | ) |
| Net change in unrealized appreciation (depreciation) on investments. | | (42,813 | ) | | 35,799 | | | 31,136 | |
| Net realized and unrealized gain (loss) | | (38,942 | ) | | 33,436 | | | 24,196 | |
| Net increase (decrease) in net assets resulting from operations | $ | (32,632 | ) | $ | 50,799 | | $ | 27,155 | |
34 Semiannual Report | The accompanying notes are an integral part of these financial statements. nextstepfunds.com
| | | | | | | | | | | | |
| | | | | | FRANKLIN FUND ALLOCATOR SERIES | |
| | | | | | | | | FINANCIAL STATEMENTS | |
| |
| |
| Statements of Changes in Net Assets | | | | | | | | | | | | |
| |
| | | Franklin NextStep | | | Franklin NextStep | |
| | | Conservative Fund | | | Moderate Fund | |
| | | Six Months Ended | | | | | | Six Months Ended | | | | |
| | | November 30, 2016 | | | Year Ended | | | November 30, 2016 | | | Year Ended | |
| | | (unaudited) | | | May 31, 2016a | | | (unaudited) | | | May 31, 2016a | |
| Increase (decrease) in net assets: | | | | | | | | | | | | |
| Operations: | | | | | | | | | | | | |
| Net investment income | $ | 6,310 | | $ | 785 | | $ | 17,363 | | $ | 1,034 | |
| Net realized gain (loss) | | 3,871 | | | 226 | | | (2,363 | ) | | (2,204 | ) |
| Net change in unrealized appreciation | | | | | | | | | | | | |
| (depreciation) | | (42,813 | ) | | 16,919 | | | 35,799 | | | 103,690 | |
| Net increase (decrease) in net assets | | | | | | | | | | | | |
| resulting from operations | | (32,632 | ) | | 17,930 | | | 50,799 | | | 102,520 | |
| Distributions to shareholders from: | | | | | | | | | | | | |
| Net investment income: | | | | | | | | | | | | |
| Class A | | (2,537 | ) | | (132 | ) | | (12,317 | ) | | (220 | ) |
| Class C | | (2,521 | ) | | (139 | ) | | (4,550 | ) | | (56 | ) |
| Advisor Class | | (21 | ) | | — | | | (34 | ) | | — | |
| Total distributions to shareholders | | (5,079 | ) | | (271 | ) | | (16,901 | ) | | (276 | ) |
| Capital share transactions: (Note 2) | | | | | | | | | | | | |
| Class A | | 406,738 | | | 539,137 | | | 2,289,686 | | | 3,204,582 | |
| Class C | | 2,010,193 | | | 365,570 | | | 3,561,543 | | | 1,341,698 | |
| Advisor Class | | 5,290 | | | — | | | 79,717 | | | — | |
| Total capital share transactions | | 2,422,221 | | | 904,707 | | | 5,930,946 | | | 4,546,280 | |
| Net increase (decrease) in net assets | | 2,384,510 | | | 922,366 | | | 5,964,844 | | | 4,648,524 | |
| Net assets: | | | | | | | | | | | | |
| Beginning of period | | 922,366 | | | — | | | 4,648,524 | | | — | |
| End of period | $ | 3,306,876 | | $ | 922,366 | | $ | 10,613,368 | | $ | 4,648,524 | |
| Undistributed net investment income included in net | | | | | | | | | | | | |
| assets: | | | | | | | | | | | | |
| End of period | $ | 2,691 | | $ | 1,460 | | $ | 3,991 | | $ | 3,529 | |
aFor the period February 5, 2016 (commencement of operations) to May 31, 2016.
nextstepfunds.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 35
| | | | | | | |
| FRANKLIN FUND ALLOCATOR SERIES | | | | | | | |
| FINANCIAL STATEMENTS | | | | | | | |
| |
| |
| Statements of Changes in Net Assets (continued) | | | | | | | |
| |
| | | Franklin NextStep | | |
| | | Growth Fund | | |
| | | Six Months Ended | | | | | |
| | | November 30, 2016 | | | Year Ended | |
| | | (unaudited) | | | May 31, 2016a | |
| Increase (decrease) in net assets: | | | | | | | |
| Operations: | | | | | | | |
| Net investment income (loss) | $ | 2,959 | | | $ | (499 | ) |
| Net realized gain (loss) | | (6,940 | ) | | | (1,985 | ) |
| Net change in unrealized appreciation (depreciation) | | 31,136 | | | | 45,247 | |
| Net increase (decrease) in net assets resulting from operations | | 27,155 | | | | 42,763 | |
| Distributions to shareholders from: | | | | | | | |
| Net investment income: | | | | | | | |
| Class A | | — | | | | (29 | ) |
| Class C | | — | | | | (19 | ) |
| Total distributions to shareholders | | — | | | | (48 | ) |
| Capital share transactions: (Note 2) | | | | | | | |
| Class A | | 1,407,328 | | | | 1,103,558 | |
| Class C | | 876,268 | | | | 643,650 | |
| Advisor Class | | 5,000 | | | | — | |
| Total capital share transactions | | 2,288,596 | | | | 1,747,208 | |
| Net increase (decrease) in net assets | | 2,315,751 | | | | 1,789,923 | |
| Net assets: | | | | | | | |
| Beginning of period | | 1,789,923 | | | | — | |
| End of period | $ | 4,105,674 | | $ | 1,789,923 | |
| Undistributed net investment income included in net assets: | | | | | | | |
| End of period | $ | 3,429 | | | $ | 470 | |
aFor the period February 5, 2016 (commencement of operations) to May 31, 2016.
36 Semiannual Report | The accompanying notes are an integral part of these financial statements. nextstepfunds.com
FRANKLIN FUND ALLOCATOR SERIES
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Fund Allocator Series (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of twenty-two separate funds, three of which are included in this report (Funds) and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). The financial statements of the remaining funds in the Trust are presented separately. The Funds invest in mutual funds (Underlying Funds) and exchange traded funds (ETFs), including affiliated funds managed by Franklin Templeton (FT Underlying Funds). The Funds offer three classes of shares: Class A, Class C, and Advisor Class. Effective June 15, 2016, the Funds began offering a new class of shares, Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution fees.
The accounting policies of the Underlying Funds are outlined in their respective shareholder reports. A copy of the Underlying Funds’ shareholder reports, in which each fund invests, is available on the U.S. Securities and Exchange Commission (SEC) website at sec.gov or at the SEC’s Public Reference Room in Washington, D.C. The Underlying Funds’ shareholder reports are not covered by this report.
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
The Funds’ investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Funds calculate the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Funds’ administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Funds’ valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Funds to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value. Investments in the Underlying Funds are valued at their closing NAV each trading day. 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.
The Funds have procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
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 may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of November 30, 2016, each Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax
nextstepfunds.com
Semiannual Report 37
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting
Policies (continued)
b. Income Taxes (continued)
years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
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 is 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 U.S. GAAP. 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. Offering Costs
Offering costs are amortized on a straight line basis over twelve months.
e. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP 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.
f. 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.
38 Semiannual Report
nextstepfunds.com
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
2. Shares of Beneficial Interest
At November 30, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Funds’ shares were as follows:
| | | | | | | | | | | |
| | Franklin NextStep | | Franklin NextStep | |
| | Conservative Fund | | Moderate Fund | |
| | Shares | | | Amount | | Shares | | | Amount | |
| Class A Shares: | | | | | | | | | | | |
| Six Months ended November 30, 2016 | | | | | | | | | | | |
| Shares sold | 58,679 | | | $ | 619,018 | | 227,794 | | $ | 2,489,124 | |
| Shares issued in reinvestment of distributions | 191 | | | | 2,013 | | 1,111 | | | 12,228 | |
| Shares redeemed. | (20,434 | ) | | (214,293 | ) | (19,317 | ) | | (211,666 | ) |
| Net increase (decrease) | 38,436 | | | $ | 406,738 | | 209,588 | | $ | 2,289,686 | |
| Year ended May 31, 2016a | | | | | | | | | | | |
| Shares sold | 52,683 | | | $ | 539,090 | | 326,243 | | $ | 3,446,444 | |
| Shares issued in reinvestment of distributions | 5 | | | | 47 | | 18 | | | 195 | |
| Shares redeemed. | — | | | | — | | (22,629 | ) | | (242,057 | ) |
| Net increase (decrease) | 52,688 | | | $ | 539,137 | | 303,632 | | $ | 3,204,582 | |
| Class C Shares: | | | | | | | | | | | |
| Six Months ended November 30, 2016 | | | | | | | | | | | |
| Shares sold | 214,526 | | $ | 2,256,979 | | 362,686 | | $ | 3,950,157 | |
| Shares issued in reinvestment of distributions | 208 | | | | 2,190 | | 411 | | | 4,523 | |
| Shares redeemed. | (23,837 | ) | | (248,976 | ) | (35,935 | ) | | (393,137 | ) |
| Net increase (decrease) | 190,897 | | $ | 2,010,193 | | 327,162 | | $ | 3,561,543 | |
| Year ended May 31, 2016a | | | | | | | | | | | |
| Shares sold | 35,916 | | | $ | 365,516 | | 127,004 | | $ | 1,341,668 | |
| Shares issued in reinvestment of distributions | 5 | | | | 54 | | 3 | | | 30 | |
| Net increase (decrease) | 35,921 | | | $ | 365,570 | | 127,007 | | $ | 1,341,698 | |
| Advisor Class Shares: | | | | | | | | | | | |
| Six Months ended November 30, 2016b | | | | | | | | | | | |
| Shares sold | 507 | | | $ | 5,290 | | 7,325 | | $ | 79,700 | |
| Shares issued in reinvestment of distributions | — | | | | — | | 2 | | | 17 | |
| Net increase (decrease) | 507 | | | $ | 5,290 | | 7,327 | | $ | 79,717 | |
| |
| |
| aFor the period February 5, 2016 (commencement of operations) to May 31, 2016. | | | | | | | | | | | |
| bFor the period June 15, 2016 (effective date) to November 30, 2016. | | | | | | | | | | | |
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Semiannual Report 39
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | |
| 2. Shares of Beneficial Interest (continued) | | | | | | |
| |
| | Franklin NextStep | |
| | Growth Fund | |
| | Shares | | | | Amount | |
| Class A Shares: | | | | | | |
| Six Months ended November 30, 2016 | | | | | | |
| Shares sold | 158,768 | | $ | 1,742,260 | |
| Shares redeemed | (30,331 | ) | | | (334,932 | ) |
| Net increase (decrease) | 128,437 | | $ | 1,407,328 | |
| Year ended May 31, 2016a | | | | | | |
| Shares sold | 105,009 | | $ | 1,116,905 | |
| Shares issued in reinvestment of distributions | 1 | | | | 11 | |
| Shares redeemed | (1,250 | ) | | | (13,358 | ) |
| Net increase (decrease) | 103,760 | | $ | 1,103,558 | |
| Class C Shares: | | | | | | |
| Six Months ended November 30, 2016 | | | | | | |
| Shares sold | 104,350 | | $ | 1,141,936 | |
| Shares redeemed | (24,550 | ) | | | (265,668 | ) |
| Net increase (decrease) | 79,800 | | | $ | 876,268 | |
| Year ended May 31, 2016a | | | | | | |
| Shares sold | 85,011 | | | $ | 901,364 | |
| Shares redeemed | (24,126 | ) | | | (257,714 | ) |
| Net increase (decrease) | 60,885 | | | $ | 643,650 | |
| Advisor Class Shares: | | | | | | |
| Six Months ended November 30, 2016b | | | | | | |
| Shares sold | 465 | | | $ | 5,000 | |
aFor the period February 5, 2016 (commencement of operations) to May 31, 2016.
bFor the period June 15, 2016 (effective date) to November 30, 2016.
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 of certain of the FT Underlying Funds and of the following subsidiaries:
| |
| Subsidiary | Affiliation |
| Franklin Advisers, Inc. (Advisers) | Investment manager |
| Franklin Templeton Investments Corp. (FTIC) | Investment manager |
| K2/D&S Management Co., LLC (K2 Advisors) | Investment manager |
| Franklin Templeton Services, LLC (FT Services) | Administrative manager |
| Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
| Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
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FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
a. Management Fees
The Funds pay an investment management 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 Underlying Funds and ETFs.
Under a subadvisory agreement, FTIC and K2 Advisors, affiliates of Advisers, provide subadvisory services to the Funds. The subadvisory fee is paid by Advisers based on each Fund’s average daily net assets, and is not an additional expense of the Funds.
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on each of the Funds’ average net assets, and is not an additional expense of the Funds.
c. Distribution Fees
The Board 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 for each class. 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 C 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. The plan year, for purposes of monitoring compliance with the maximum annual plan rate, is February 1 through January 31 for each Fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
| | |
| Class A | 0.25 | % |
| Class C | 1.00 | % |
| |
| d. Sales Charges/Underwriting Agreements | | |
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Funds. These charges are deducted from the proceeds of sales of fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds’ shares for the period:
| | | | | | |
| | | Franklin | | Franklin | | Franklin |
| | | NextStep | | NextStep | | NextStep |
| | | Conservative | | Moderate | | Growth |
| | | Fund | | Fund | | Fund |
| |
| Sales charges retained net of commissions paid to | | | | | | |
| unaffiliated brokers/dealers | $ | 1,077 | $ | 13,651 | $ | 7,078 |
| CDSC retained | $ | 234 | $ | 1,889 | $ | — |
| |
| e. Transfer Agent Fees | | | | | | |
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets.
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Semiannual Report 41
FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| 3. | Transactions with Affiliates (continued) |
| e. | Transfer Agent Fees (continued) |
For the period ended November 30, 2016, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
| | | | | | |
| | | Franklin | | Franklin | | Franklin |
| | | NextStep | | NextStep | | NextStep |
| | | Conservative | | Moderate | | Growth |
| | | Fund | | Fund | | Fund |
| |
| Transfer agent fees | $ | 196 | $ | 658 | $ | 450 |
| |
| f. Investments in FT Underlying Funds | | | | | | |
The Funds invest in FT Underlying Funds which are managed by Advisers or by an affiliate of Advisers. The Funds do not invest in FT Underlying Funds for the purpose of exercising a controlling influence over the management or policies. Investment management fees paid by the Funds are waived on assets invested in Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), as noted in the Statements of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by the Sweep Money Fund.
| | | | | | | | | | | | | | | |
| Investments in FT Underlying Funds for the period ended November 30, 2016, were as follows: | | | | | | | | |
| |
| | | | | | | | | | | | | | | % of | |
| | | | | | | | | | | | | | | FT Underlying | |
| | Number of | | | | Number of | | | | | | | | | Fund Shares | |
| | Shares Held | | | | Shares | | Value | | | | | | | Outstanding | |
| | at Beginning | Gross | Gross Held at End | | at End | | Investment | | | Realized | | Held at End | |
| FT Underlying Funds | of Period | Additions | Reductions | | of Period | | of Period | | Income | | | Gain (Loss) | | of Period | |
| |
| Franklin NextStep Conservative Fund | | | | | | | | | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | | | | | | |
| Franklin Focused Core Equity Fund, Class R6 | 2,409 | 9,091 | (1,296 | ) | 10,204 | $ | 147,445 | | $ – | | $ | (329 | ) | 0.1 | % |
| Franklin Growth Opportunities Fund, Class R6 | 328 | 133 | (461 | ) | – | | –a | | – | | | 575 | | – | |
| Franklin Mutual European Fund, Class R6 | 1,038 | 2,568 | (703 | ) | 2,903 | | 54,020 | | 34 | | | (414 | )b | –c | |
| Franklin Strategic Income Fund, Class R6 | – | 30,787 | (1,582 | ) | 29,205 | | 278,322 | | 1,567 | | | (87 | ) | –c | |
| Franklin Total Return Fund, Class R6 | 16,884 | 6,863 | (23,747 | ) | – | | –a | | 220 | | | 6,536 | | – | |
| Institutional Fiduciary Trust Money Market Portfolio . | 58,273 | 1,763,419 | (1,595,940 | ) | 225,752 | | 225,752 | | – | | | – | | –c | |
| Templeton Global Total Return Fund, Class R6 | 5,695 | 23,962 | (3,516 | ) | 26,141 | | 306,373 | | 2,751 | d | | (268 | ) | –c | |
| Total | | | | | | $ | 1,011,912 | $ | 4,572 | | $ | 6,013 | | | |
| |
| Franklin NextStep Moderate Fund | | | | | | | | | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | | | | | | |
| Franklin Focused Core Equity Fund, Class R6 | 19,714 | 38,097 | (1,155 | ) | 56,656 | $ | 818,680 | | $ – | | $ | (247 | ) | 0.6 | % |
| Franklin Growth Opportunities Fund, Class R6 | 6,052 | 2,720 | (8,772 | ) | – | | –a | | – | | | 11,323 | | – | |
| Franklin K2 Alternative Strategies Fund, Class R6 | 8,672 | 30,780 | (499 | ) | 38,953 | | 420,693 | | – | | | (53 | ) | –c | |
| Franklin Mutual European Fund, Class R6 | 12,632 | 13,141 | (4,230 | ) | 21,543 | | 400,909 | | 329 | | | (1,011 | )b | –c | |
| Franklin Small Cap Growth Fund, Class R6 | – | 8,399 | (339 | ) | 8,060 | | 161,693 | | – | | | (43 | ) | –c | |
| Franklin Strategic Income Fund, Class R6 | – | 45,426 | (2,375 | ) | 43,051 | | 410,279 | | 2,921 | | | (428 | ) | –c | |
| Franklin Total Return Fund, Class R6 | 27,827 | 9,541 | (37,368 | ) | – | | –a | | 377 | | | 9,444 | | – | |
| Institutional Fiduciary Trust Money Market Portfolio . | 273,535 | 3,157,326 | (2,791,879 | ) | 638,982 | | 638,982 | | – | | | – | | –c | |
| Templeton Global Total Return Fund, Class R6 | 25,218 | 42,623 | (2,283 | ) | 65,558 | | 768,338 | | 8,409 | d | | (631 | ) | –c | |
| Total | | | | | | $ | 3,619,574 | $ | 12,036 | | $ | 18,354 | | | |
| |
| Franklin NextStep Growth Fund | | | | | | | | | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | | | | | | |
| Franklin Focused Core Equity Fund, Class R6 | 9,903 | 22,119 | (3,229 | ) | 28,793 | $ | 416,058 | | $ – | | $ | (167 | ) | 0.3 | % |
| Franklin Growth Opportunities Fund, Class R6 | 3,040 | 1,465 | (4,505 | ) | – | | –a | | – | | | 6,083 | | – | |
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FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | % of |
| | | | | | | | | | | | | | | FT Underlying |
| | Number of | | | | Number of | | | | | | | | | Fund Shares |
| | Shares Held | | | | Shares | | Value | | | | | | | Outstanding |
| | at Beginning | Gross | Gross | | Held at End | | at End | | Investment | | | Realized | | Held at End |
| FT Underlying Funds | of Period | Additions | Reductions | | of Period | | of Period | | Income | | | Gain (Loss) | | of Period |
| |
| Franklin NextStep Growth Fund (continued) | | | | | | | | | | | | | | |
| Non-Controlled Affiliates (continued) | | | | | | | | | | | | | | |
| Franklin K2 Alternative Strategies Fund, Class R6 | 3,278 | 12,411 | (843 | ) | 14,846 | $ | 160,335 | | $ – | | $ | (41 | ) | –c |
| Franklin Mutual European Fund, Class R6 | 5,979 | 7,850 | (3,752 | ) | 10,077 | | 187,528 | | 147 | | | (1,473 | )b | –c |
| Franklin Small Cap Growth Fund, Class R6 | 1,902 | 7,348 | (1,103 | ) | 8,147 | | 163,433 | | – | | | 147 | | –c |
| Institutional Fiduciary Trust Money Market Portfolio . | 119,757 | 1,844,131 | (1,734,638 | ) | 229,250 | | 229,250 | | – | | | – | | –c |
| Templeton Global Total Return Fund, Class R6 | 5,492 | 10,930 | (2,105 | ) | 14,317 | | 167,801 | | 1,793 | d | | (432 | ) | –c |
| Total | | | | | | $ | 1,324,405 | $ | 1,940 | | $ | 4,117 | | |
aAs of November 30, 2016, no longer held by the fund.
bIncludes realized gain distributions received.
cRounds to less than 0.1%.
dA portion or all of the investment income is likely to be deemed a tax return of capital.
g. Waiver and Expense Reimbursements
Advisers has contractually agreed in advance to waive or limit its respective fees and to assume as its own expense certain expenses otherwise payable by the Funds so that the expenses (excluding distribution fees, and acquired fund fees and expenses) for each class of the Funds do not exceed 0.35% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until September 30, 2017. Total expenses waived or paid are not subject to recapture subsequent to the Funds’ fiscal year end.
h. Other Affiliated Transactions
At November 30, 2016, Franklin Resources, Inc. owned 9.5% of Franklin NextStep Conservative Fund.
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 period ended November 30, 2016, there were no credits earned.
5. Income Taxes
At November 30, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
| | | | | | | | | |
| | | Franklin | | | Franklin | | | Franklin | |
| | | NextStep | | | NextStep | | | NextStep | |
| | | Conservative | | | Moderate | | | Growth | |
| | | Fund | | | Fund | | | Fund | |
| |
| Cost of investments | $ | 3,254,332 | | $ | 10,399,630 | | $ | 3,972,162 | |
| |
| Unrealized appreciation | $ | 31,526 | | $ | 244,870 | | $ | 112,329 | |
| Unrealized depreciation | | (57,907 | ) | | (108,216 | ) | | (38,649 | ) |
| Net unrealized appreciation (depreciation) | $ | (26,381 | ) | $ | 136,654 | | $ | 73,680 | |
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FRANKLIN FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
5. Income Taxes (continued)
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of offering costs and wash sales.
6. Investment Transactions
Purchases and sales of Underlying Funds and ETFs (excluding short term securities) for the period ended November 30, 2016, were as follows:
| | | | | | |
| | | Franklin | | Franklin | | Franklin |
| | | NextStep | | NextStep | | NextStep |
| | | Conservative | | Moderate | | Growth |
| | | Fund | | Fund | | Fund |
| |
| Purchases | $ | 2,841,981 | $ | 7,428,068 | $ | 3,226,198 |
| Sales | $ | 616,264 | $ | 1,897,842 | $ | 1,068,373 |
7. 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’ financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of financial instruments)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
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 November 30, 2016, all of the Funds’ investments in financial instruments carried at fair value were valued using Level 1 inputs.
For detailed categories, see the accompanying Statements of Investments.
8. 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.
|
| Abbreviations |
| Selected Portfolio |
| ETF Exchange Traded Fund |
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FRANKLIN 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, 300 S.E. 2nd Street,
Fort Lauderdale, FL 33301, 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.
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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. N/A
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 principal 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 changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting 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 FUND ALLOCATOR SERIES
By /s/Laura F. Fergerson
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date January 26, 2017
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 January 26, 2017
By /s/Gaston Gardey
Gaston Gardey
Chief Financial Officer and Chief Accounting Officer
Date January 26, 2017
