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_811-22641
__Franklin Alternative Strategies Funds
(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: 11/30/13
Item 1. Reports to Stockholders.
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Contents | |||||
Shareholder Letter | 1 | Semiannual Report | |||
Franklin K2 Alternative Strategies Fund | 3 | Financial Statements | 51 | ||
Performance Summary | 9 | Notes to Financial Statements | 56 | ||
Your Fund’s Expenses | 12 | Shareholder Information | 75 | ||
Financial Highlights and | |||||
Statement of Investments | 14 |
| 1
Semiannual Report
Franklin K2 Alternative Strategies Fund
Your Fund’s Goal and Main Investments: Franklin K2 Alternative Strategies Fund seeks capital appreciation with lower volatility relative to the broad equity markets. The Fund seeks to achieve its investment goal by allocating its assets across multiple non-traditional or “alternative” strategies, including but not limited to long short equity, event driven, relative value and global macro. The Fund is structured as a multi-manager fund, meaning the Fund’s assets are independently managed by multiple investment managers (subadvisors), while the Fund’s investment manager retains overall responsibility for the Fund’s investments. The Fund may invest in a wide range of securities and other investments including, but not limited to: equity securities including common stocks, preferred stocks, convertible securities, rights and warrants, private and registered investment vehicles and exchange traded funds; and debt securities including bonds, notes, debentures and commercial paper; loans and loan participations; and mortgage-backed or other asset-backed securities, including collateralized debt obligations; as well as derivatives, commodities and currencies.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.
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We are pleased to bring you this semiannual report for Franklin K2 Alternative Strategies Fund covering the period from the Fund’s inception on October 11, 2013, through November 30, 2013.
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 19.
Semiannual Report | 3
Performance Overview
For the period under review, Franklin K2 Alternative Strategies Fund – Class A delivered a +2.30% cumulative total return. For comparison, the Fund’s primary benchmark, the BofA Merrill Lynch 3 Month U.S. Treasury Bill Index, which tracks the performance of short-term U.S. government securities with a remaining term to final maturity of less than three months, had a +0.04% total return.1 Also for comparison, the Fund’s secondary benchmark, the HFRX Global Hedge Fund Index, which is designed to be representative of the overall composition of the hedge fund universe, generated a +1.58% total return.2 You can find more of the Fund’s performance data in the Performance Summary beginning on page 9.
Economic and Market Overview
During the period from October 11, 2013, through November 30, 2013, investors remained preoccupied with the timing of the U.S. Federal Reserve Board’s (Fed’s) next policy move regarding its asset purchases. The Fed hoped to shift attention from its bond buying to forward guidance, namely its commitment to remain accommodative and hold short-term rates low for an extended period of time.
In November, major economies reported mixed third-quarter gross domestic product (GDP) growth rates. While the developed economies of the U.S. and Canada strengthened, Europe’s growth slowed to a near standstill and Japan’s expansion eased substantially after growing for several consecutive quarters. Mexico’s emerging economy returned to modest growth, but a contraction in Brazil’s output was the worst in more than four years. Against this backdrop, global developed and emerging market stocks, as measured by the MSCI All Country World Index, moved higher.
In the U.S., positive employment and residential real estate trends generally exceeded expectations, the economy expanded in the third quarter at its fastest pace in more than a year and several major U.S. equity indexes reached new
1. Source: FactSet. © 2014 FactSet Research Systems Inc. All Rights Reserved. The information contained herein: (1) is proprietary to FactSet Research Systems Inc. and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither FactSet Research Systems Inc. nor its content providers are responsible for any damages or losses arising from any use of this information.
2. Sources: FactSet; Hedge Fund Research, Inc. The HFRX Global Hedge Fund Index is being used under license from Hedge Fund Research, Inc., which does not endorse or approve of any of the contents of this report.
The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
4 | Semiannual Report
highs. Notably, the national jobless rate declined to its lowest level since 2008. Nonetheless, market volatility surfaced surrounding speculation over the timing of the Fed’s tapering of its asset purchase program and a partial U.S. federal government shutdown. Toward period-end, improving U.S. employment data reignited speculation that tapering could begin as early as December.
In Europe, the eurozone unemployment rate improved for the first time in more than two years, and accommodative policies remained intact as the European Central Bank (ECB) lowered its benchmark interest rate in November following the region’s anemic economic growth. This swift and unexpected ECB response lifted market sentiment, which was otherwise kept in check to a degree by sovereign debt rating downgrades of France and the Netherlands owing to their worsening growth prospects and public finances. However, credit outlooks for Spain and Portugal were raised to stable because of the positive effect budget cuts and structural reforms have had on these countries’ fiscal states. Outside of the eurozone, U.K. third-quarter GDP climbed at its fastest quarterly pace in years.
Major Asian economies, including South Korea, Taiwan, China and Japan, experienced improving export shipments and orders because of stronger global demand. Emerging market central banks tended to be less accommodative than their developed market peers. For example, Brazil’s and India’s central banks raised interest rates amid rising inflation and China’s central bank tightened liquidity to curb real estate and credit speculation.
Investment Strategy
We manage the Fund using a multi-manager approach. While we are responsible for the Fund’s overall investments, we allocate assets to multiple subadvisors, each of whom independently manages a separate portion of the Fund’s portfolio in accordance with some or all of the following strategies: long short equity, event driven, relative value and global macro. We allocate the Fund’s assets among these strategies utilizing a top-down approach, generating strategy weightings by taking into account market conditions, risk factors, diversifica-tion, liquidity, transparency, and availability of various subadvisors and other investment options, among other things. The allocations to the strategies may change from time to time based upon our assessment of their correlations to various markets and to each other, their risk profiles and return expectations. Long short equity strategies generally seek to produce returns from investments in the global equity markets by taking long and short positions in stocks
Subadvisors |
11/30/13 |
Long Short Equity |
Chilton Investment Company, LLC |
Impala Asset Management LLC |
Jennison Associates LLC |
Event Driven |
P. Schoenfeld Asset Management LP |
York Registered Holdings, L.P. |
Relative Value |
Basso Capital Management, L.P. |
Chatham Asset Management LLC |
Lazard Asset Management LLC |
Loomis Sayles & Company, L.P. |
Semiannual Report | 5
What is a futures contract?
A futures contract, also called a “future,” is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell a security at a specific price on a future date.
What is a swap agreement?
A swap agreement, such as an equity total return swap, is a contract between the Fund and a counterparty to exchange on a future date the returns, or differentials in rates of return, that would have been earned or realized if a notional amount were invested in spe-cific instruments.
An interest rate swap is an agreement between two parties to exchange interest rate obligations, generally one based on an interest rate fixed to maturity and the other based on an interest rate that changes in accordance with changes in a designated benchmark (for example, LIBOR, prime, commercial paper or other benchmarks).
and common stock indexes. Event driven strategies generally invest in securities of companies undergoing significant corporate changes and new developments. Relative value strategies encompass a wide range of investment techniques that are intended to profit from pricing inefficiencies. Global macro strategies generally focus on major economic opportunities across numerous markets and investments.
The Fund may take long and/or short positions in a wide range of asset classes, including equities, fixed income, commodities and currencies, among others. Long positions benefit from an increase in the price of the underlying instrument or asset class, while short positions benefit from a decrease in that price. The Fund may use derivatives for hedging and nonhedging (investment) purposes. Such derivative investments may include futures contracts, swaps, options and currency forward contracts. The Fund may engage in active and frequent trading as part of its investment strategies.
Manager’s Discussion
The Fund’s assets were allocated to three strategies during the period: long short equity, event driven and relative value. Each of these strategies contributed to Fund performance during the period.
The Fund’s long short equity strategy managers were Chilton Investment Co., Impala Asset Management and Jennison Associates. The long short equity strategy was the largest contributor during the period, benefiting from its net long bias in a rallying equity market and stock selection, particularly in the subadvisors’ long portfolios. Subadvisor performance varied depending on market exposure and individual security selection, but all three managers posted strong positive returns for the reporting period. As the equity markets reacted to a new round of earnings announcements, the Fund’s long short equity subadvisors found opportunities in airline and consumer retail stocks. Airlines in particular benefited from declining fuel costs, rising passenger miles flown and continued sector consolidation. Certain consumer retail stocks reported stronger earnings based on rising global
3. The health care sector comprises biotechnology, health care equipment and supplies, health care providers and services, and pharmaceuticals in the Statement of Investments.
6 | Semiannual Report
sales. Because equity markets rallied during the period, the strategy’s most substantial detractors included index hedges. In addition, a swift market rotation out of the biotechnology industry triggered by several disappointing earnings announcements proved challenging for health care sector investments in October, although several rebounded meaningfully in November.3
Our event driven strategy managers were P. Schoenfeld Asset Management and York Registered Holdings. During the period, the Fund’s event driven allocation was the second-largest contributor to performance. Security selection and active trading were responsible for a portion of the gains, and the strategy also benefited from the equity market rally, which provided a tailwind for several merger arbitrage and special situations equity positions. This was particularly notable in the telecommunication services sector, where subadvisors found a number of attractive opportunities. Other notable contributors included event-driven opportunities in the information technology and industrials sectors.4 Given the aforementioned equity market strength, the strategy’s primary detractors were the subadvisors’ hedging positions.
The Fund’s relative value strategy managers were Basso Capital Management, Lazard Asset Management, Chatham Asset Management and Loomis, Sayles & Co. The relative value strategy also contributed to performance during the period. Although this strategy represented the Fund’s largest allocation at period-end, its lower sensitivity to equity markets constrained performance relative to the broader markets. Because of the varying market risk exposure of the subadvisors’ portfolios, this group also had the largest dispersion in performance. Similar to other strategies, individual position performance drivers were diverse, with positive contributions from convertible arbitrage and high yield credit investments, particularly in the energy, media and hospitality sectors.5 As with other strategies, primary detractors included market hedges implemented via equity and credit index futures, options, and swaps, along with several single-issuer short exposures.
4. The information technology sector comprises computers and peripherals, Internet software and services, semiconductors and semiconductor equipment, and software in the Statement of Investments. The industrials sector comprises aerospace and defense, airlines, commercial and professional services, commercial services and supplies, engineering and construction, electrical equipment, industrial conglomerates, machinery and transportation in the Statement of Investments.
5. The energy sector comprises energy equipment and services and oil; gas and consumable fuels in the Statement of Investments. Hospitality comprises hotels, restaurants and leisure in the Statement of Investments.
What is an option?
An option is a contract to buy or sell a specific financial product known as the option’s underlying instrument at a specific price. The buyer of an option has the right, but not the obligation, to buy or sell the underlying instrument at or until a specified expiration date. Conversely, the seller (“writer”) of an option who opens a transaction is obligated to buy or sell the underlying instrument should the option holder exercise that right.
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 at a specific exchange rate on a future date.
Semiannual Report | 7
Thank you for your participation in Franklin K2 Alternative Strategies Fund. We look forward to serving your future investment needs.
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Portfolio Managers
Franklin K2 Alternative Strategies Fund
The foregoing information reflects our analysis, opinions and portfolio holdings as of November 30, 2013, 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.
8 | Semiannual Report
Performance Summary as of 11/30/13
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Price Information | ||||||
Class A (Symbol: FAAAX) | Change | 11/30/13 | 10/11/13 | |||
Net Asset Value (NAV) | +$ | 0.23 | $ | 10.23 | $ | 10.00 |
Class C (Symbol: FASCX) | Change | 11/30/13 | 10/11/13 | |||
Net Asset Value (NAV) | +$ | 0.23 | $ | 10.23 | $ | 10.00 |
Class R (Symbol: FSKKX) | Change | 11/30/13 | 10/11/13 | |||
Net Asset Value (NAV) | +$ | 0.23 | $ | 10.23 | $ | 10.00 |
Class R6 (Symbol: FASRX) | Change | 11/30/13 | 10/11/13 | |||
Net Asset Value (NAV) | +$ | 0.23 | $ | 10.23 | $ | 10.00 |
Advisor Class (Symbol: FABZX) | Change | 11/30/13 | 10/11/13 | |||
Net Asset Value (NAV) | +$ | 0.23 | $ | 10.23 | $ | 10.00 |
Semiannual Report | 9
Performance Summary (continued)
Performance1
Cumulative total return excludes sales charges. Aggregate total returns and value of $10,000 investment include maximum sales charges. Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only; Class R/R6/Advisor Class: no sales charges.
Class A | Inception (10/11/13) | |||
Cumulative Total Return2 | + | 2.30 | % | |
Aggregate Total Return3 | -3.58 | % | ||
Aggregate Total Return (12/31/13)4 | -1.78 | % | ||
Value of $10,000 Investment5 | $ | 9,642 | ||
Total Annual Operating Expenses6 | 2.75% (with waiver) | 3.54% (without waiver) | ||
Class C | Inception (10/11/13) | |||
Cumulative Total Return2 | + | 2.30 | % | |
Aggregate Total Return3 | + | 1.30 | % | |
Aggregate Total Return (12/31/13)4 | + | 3.11 | % | |
Value of $10,000 Investment5 | $ | 10,130 | ||
Total Annual Operating Expenses6 | 3.45% (with waiver) | 4.24% (without waiver) | ||
Class R | Inception (10/11/13) | |||
Cumulative Total Return2 | + | 2.30 | % | |
Aggregate Total Return3 | + | 2.30 | % | |
Aggregate Total Return (12/31/13)4 | + | 4.21 | % | |
Value of $10,000 Investment5 | $ | 10,230 | ||
Total Annual Operating Expenses6 | 2.95% (with waiver) | 3.74% (without waiver) | ||
Class R6 | Inception (10/11/13) | |||
Cumulative Total Return2 | + | 2.30 | % | |
Aggregate Total Return3 | + | 2.30 | % | |
Aggregate Total Return (12/31/13)4 | + | 4.21 | % | |
Value of $10,000 Investment5 | $ | 10,230 | ||
Total Annual Operating Expenses6 | 2.44% (with waiver) | 3.23% (without waiver) | ||
Advisor Class | Inception (10/11/13) | |||
Cumulative Total Return2 | + | 2.30 | % | |
Aggregate Total Return3 | + | 2.30 | % | |
Aggregate Total Return (12/31/13)4 | + | 4.21 | % | |
Value of $10,000 Investment5 | $ | 10,230 | ||
Total Annual Operating Expenses6 | 2.45% (with waiver) | 3.24% (without waiver) |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
10 | Semiannual Report
Performance Summary (continued)
Endnotes
All investments involve risks, including possible loss of principal. The market values of securities owned by the Fund will go up or down, sometimes rapidly or unpredictably. The Fund’s performance depends on the manager’s skill in selecting, overseeing, and allocating fund assets. The Fund is actively managed and could experience losses if the investment manager’s and subadvisors’ judgment about particular investments made for the Fund’s portfolio prove to be incorrect. Some subadvisors may have little or no experience managing registered investment companies. Foreign investments are subject to greater investment risk such as political, economic, credit and information risks as well as risk of currency fluctuations. Investments in derivatives involve costs and create economic leverage, which may result in significant volatility and cause the Fund to participate in losses that significantly exceed the Fund’s initial investment. Lower rated or high yield debt securities involve greater credit risk, including the possibility of default or bankruptcy. The Fund may make short sales of securities, which involves the risk that losses may exceed the original amount invested. Merger arbitrage investments risk loss if a proposed reorganization in which the Fund invests is renegotiated or terminated. Liquidity risk exists when securities have become more difficult to sell at the price they have been valued. The Fund may invest in investment funds, which may be more costly than investing in the underlying securities directly. The Fund’s prospectus also includes a description of the main investment risks.
Class C: | These shares have higher annual fees and expenses than Class A shares. |
Class R: | Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and |
expenses than Class A shares. | |
Class R6: | Shares are available to certain eligible investors as described in the prospectus. |
Advisor Class: | Shares are available to certain eligible investors as described in the prospectus. |
1. The Fund has an expense reduction contractually guaranteed through at least 10/4/14 and a fee waiver related to a subsidiary. Fund investment
results reflect the expense reductions, to the extent applicable; 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. Aggregate total return represents the change in value of an investment over the period indicated. Since the Fund has existed for less than one
year, average annual total return is not available.
4. In accordance with SEC rules, we provide standardized total return information through the latest calendar quarter.
5. These figures represent the value of a hypothetical $10,000 investment in the Fund over the period indicated.
6. Figures are as stated in the Fund’s current prospectus. 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
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the periods indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. | |
2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
12 | Semiannual Report
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
Beginning | Expenses Paid | |||||
Account Value | During Period* | |||||
Actual 10/11/13 | Ending Account | Actual 10/11/13–11/30/13 | ||||
Class A | Hypothetical 6/1/13 | Value 11/30/13 | Hypothetical 6/1/13–11/30/13 | |||
Actual | $ | 1,000 | $ | 1,023.00 | $ | 3.52 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,012.33 | $ | 12.81 |
Class C | ||||||
Actual | $ | 1,000 | $ | 1,023.00 | $ | 3.77 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,011.43 | $ | 13.72 |
Class R | ||||||
Actual | $ | 1,000 | $ | 1,023.00 | $ | 3.59 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,012.08 | $ | 13.06 |
Class R6 | ||||||
Actual | $ | 1,000 | $ | 1,023.00 | $ | 3.39 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,012.78 | $ | 12.36 |
Advisor Class | ||||||
Actual | $ | 1,000 | $ | 1,023.00 | $ | 3.41 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,012.73 | $ | 12.41 |
*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 2.54%; C: 2.72%; R: 2.59%; R6: 2.45% and Advisor: 2.46%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period for Hypothetical expenses. For Actual expenses, the multiplier is 50/365 to reflect the number of days since inception.
Semiannual Report | 13
Franklin Alternative Strategies Funds
Financial Highlights
Franklin K2 Alternative Strategies Fund | |||
Period Ended | |||
November 30, | |||
2013 | a | ||
Class A | (unaudited) | ||
Per share operating performance | |||
(for a share outstanding throughout the period) | |||
Net asset value, beginning of period | $ | 10.00 | |
Income from investment operationsb: | |||
Net investment income (loss)c | (0.01 | ) | |
Net realized and unrealized gains (losses) | 0.24 | ||
Total from investment operations | 0.23 | ||
Net asset value, end of period | $ | 10.23 | |
Total returnd | 2.30 | % | |
Ratios to average net assetse | |||
Expenses before waiver and payments by affiliatesf | 4.71 | % | |
Expenses net of waiver and payments by affiliatesf | 2.54 | % | |
Expenses incurred in connection with securities sold short | 0.31 | % | |
Net investment income (loss) | (0.47 | )% | |
Supplemental data | |||
Net assets, end of period (000’s) | $ | 30,711 | |
Portfolio turnover rate | 47.72 | % |
aFor the period October 11, 2013 (commencement of operations) to November 30, 2013.
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 shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and interest expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the period presented.
See Note 1(f).
14 | The accompanying notes are an integral part of these financial statements. | Semiannual Report
Franklin Alternative Strategies Funds | |||
Financial Highlights (continued) | |||
Franklin K2 Alternative Strategies Fund | |||
Period Ended | |||
November 30, | |||
2013 | a | ||
Class C | (unaudited) | ||
Per share operating performance | |||
(for a share outstanding throughout the period) | |||
Net asset value, beginning of period | $ | 10.00 | |
Income from investment operationsb: | |||
Net investment income (loss)c | (0.01 | ) | |
Net realized and unrealized gains (losses) | 0.24 | ||
Total from investment operations | 0.23 | ||
Net asset value, end of period | $ | 10.23 | |
Total returnd | 2.30 | % | |
Ratios to average net assetse | |||
Expenses before waiver and payments by affiliates f | 4.89 | % | |
Expenses net of waiver and payments by affiliatesf | 2.72 | % | |
Expenses incurred in connection with securities sold short | 0.31 | % | |
Net investment income (loss) | (0.65 | )% | |
Supplemental data | |||
Net assets, end of period (000’s) | $ | 10,254 | |
Portfolio turnover rate | 47.72 | % |
aFor the period October 11, 2013 (commencement of operations) to November 30, 2013.
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 shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and interest expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the period presented.
See Note 1(f).
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 15
Franklin Alternative Strategies Funds | |||
Financial Highlights (continued) | |||
Franklin K2 Alternative Strategies Fund | |||
Period Ended | |||
November 30, | |||
2013 | a | ||
Class R | (unaudited) | ||
Per share operating performance | |||
(for a share outstanding throughout the period) | |||
Net asset value, beginning of period | $ | 10.00 | |
Income from investment operationsb: | |||
Net investment income (loss)c | (0.01 | ) | |
Net realized and unrealized gains (losses) | 0.24 | ||
Total from investment operations | 0.23 | ||
Net asset value, end of period | $ | 10.23 | |
Total returnd | 2.30 | % | |
Ratios to average net assetse | |||
Expenses before waiver and payments by affiliates f | 4.76 | % | |
Expenses net of waiver and payments by affiliatesf | 2.59 | % | |
Expenses incurred in connection with securities sold short | 0.31 | % | |
Net investment income (loss) | (0.52 | )% | |
Supplemental data | |||
Net assets, end of period (000’s) | $ | 10,230 | |
Portfolio turnover rate | 47.72 | % |
aFor the period October 11, 2013 (commencement of operations) to November 30, 2013.
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 shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and interest expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the period presented.
See Note 1(f).
16 | The accompanying notes are an integral part of these financial statements. | Semiannual Report
Franklin Alternative Strategies Funds | |||
Financial Highlights (continued) | |||
Franklin K2 Alternative Strategies Fund | |||
Period Ended | |||
November 30, | |||
2013 | a | ||
Class R6 | (unaudited) | ||
Per share operating performance | |||
(for a share outstanding throughout the period) | |||
Net asset value, beginning of period | $ | 10.00 | |
Income from investment operationsb: | |||
Net investment income (loss)c | (0.01 | ) | |
Net realized and unrealized gains (losses) | 0.24 | ||
Total from investment operations | 0.23 | ||
Net asset value, end of period | $ | 10.23 | |
Total returnd | 2.30 | % | |
Ratios to average net assetse | |||
Expenses before waiver and payments by affiliates f | 4.62 | % | |
Expenses net of waiver and payments by affiliatesf | 2.45 | % | |
Expenses incurred in connection with securities sold short | 0.31 | % | |
Net investment income (loss) | (0.38 | )% | |
Supplemental data | |||
Net assets, end of period (000’s) | $ | 10,232 | |
Portfolio turnover rate | 47.72 | % |
aFor the period October 11, 2013 (commencement of operations) to November 30, 2013.
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 shares in relation to income earned and/or fluctuating market 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.
fIncludes dividend and interest expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the period presented.
See Note 1(f).
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 17
Franklin Alternative Strategies Funds | |||
Financial Highlights (continued) | |||
Franklin K2 Alternative Strategies Fund | |||
Period Ended | |||
November 30, | |||
2013 | a | ||
Advisor Class | (unaudited) | ||
Per share operating performance | |||
(for a share outstanding throughout the period) | |||
Net asset value, beginning of period | $ | 10.00 | |
Income from investment operationsb: | |||
Net investment income (loss)c | (0.01 | ) | |
Net realized and unrealized gains (losses) | 0.24 | ||
Total from investment operations | 0.23 | ||
Net asset value, end of period | $ | 10.23 | |
Total returnd | 2.30 | % | |
Ratios to average net assetse | |||
Expenses before waiver and payments by affiliates f | 4.63 | % | |
Expenses net of waiver and payments by affiliatesf | 2.46 | % | |
Expenses incurred in connection with securities sold short | 0.31 | % | |
Net investment income (loss) | (0.39 | )% | |
Supplemental data | |||
Net assets, end of period (000’s) | $ | 31,317 | |
Portfolio turnover rate | 47.72 | % |
aFor the period October 11, 2013 (commencement of operations) to November 30, 2013.
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 shares in relation to income earned and/or fluctuating market 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.
fIncludes dividend and interest expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the period presented.
See Note 1(f).
18 | The accompanying notes are an integral part of these financial statements. | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Common Stocks and Other Equity Interests 49.5% | ||||
Aerospace & Defense 1.2% | ||||
The Boeing Co. | United States | 2,011 | $ | 269,977 |
European Aeronautic Defence and Space Co. | France | 3,412 | 242,234 | |
a General Dynamics Corp. | United States | 2,400 | 219,984 | |
Transdigm Group, Inc. | United States | 97 | 15,182 | |
a United Technologies Corp. | United States | 3,385 | 375,261 | |
1,122,638 | ||||
Air Freight & Logistics 0.5% | ||||
a United Parcel Service, Inc. | United States | 4,259 | 436,037 | |
k XPO Logistics, Inc. | United States | 1,416 | 32,511 | |
468,548 | ||||
Airlines 1.7% | ||||
Copa Holdings SA, A | Panama | 1,484 | 224,707 | |
a Delta Air Lines, Inc. | United States | 22,238 | 644,457 | |
Deutsche Lufthansa AG | Germany | 11,583 | 251,531 | |
Japan Airlines Co. Ltd. | Japan | 2,700 | 137,340 | |
k United Continental Holdings, Inc. | United States | 3,210 | 125,993 | |
k US Airways Group, Inc. | United States | 7,459 | 175,137 | |
1,559,165 | ||||
Auto Components 0.4% | ||||
Cooper Tire & Rubber Co. | United States | 5,229 | 128,633 | |
k TRW Automotive Holdings Corp. | United States | 150 | 11,640 | |
k Visteon Corp. | United States | 3,189 | 250,783 | |
391,056 | ||||
Automobiles 1.6% | ||||
a Ford Motor Co. | United States | 17,365 | 296,594 | |
a,k General Motors Co. | United States | 21,698 | 840,364 | |
a Harley-Davidson, Inc. | United States | 4,175 | 279,808 | |
Nissan Motor Co. Ltd. | Japan | 5,800 | 53,003 | |
Toyota Motor Corp., ADR | Japan | 123 | 15,381 | |
1,485,150 | ||||
Beverages 2.5% | ||||
a Anheuser-Busch Inbev NV, ADR | Belgium | 5,181 | 529,032 | |
Beam, Inc. | United States | 6,858 | 463,120 | |
a Brown-Forman Corp. | United States | 6,300 | 472,626 | |
a,k Constellation Brands, Inc. | United States | 4,124 | 290,371 | |
a Diageo PLC, ADR | United Kingdom | 3,700 | 472,379 | |
SABMiller PLC | United Kingdom | 2,203 | 113,693 | |
2,341,221 | ||||
Biotechnology 4.9% | ||||
k ACADIA Pharmaceuticals | United States | 3,921 | 91,320 | |
a,k Acceleron Pharma, Inc. | United States | 217 | 4,724 | |
a,k Agios Pharmaceuticals, Inc. | United States | 544 | 9,547 | |
k Alexion Pharmaceuticals, Inc. | United States | 3,142 | 391,179 |
Semiannual Report | 19
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Common Stocks and Other Equity Interests (continued) | ||||
Biotechnology (continued) | ||||
a,k Alnylam Pharmaceuticals, Inc. | United States | 3,338 | $ | 204,286 |
k Biocryst Pharmaceuticals, Inc. | United States | 1,401 | 9,036 | |
a,k Biogen Idec, Inc. | United States | 1,088 | �� | 316,575 |
k Biomarin Pharmaceutical, Inc. | United States | 7,723 | 543,545 | |
k Bluebird Bio, Inc. | United States | 1,944 | 39,697 | |
a,k Celgene Corp. | United States | 497 | 80,400 | |
a,k Celldex Therapeutics, Inc. | United States | 13,252 | 367,876 | |
k Chimerix, Inc. | United States | 725 | 11,615 | |
a,k Conatus Pharmaceuticals, Inc. | United States | 2,624 | 16,741 | |
a,k Elan Corp. PLC, ADR | Ireland | 11,801 | 213,362 | |
k Exelixis, Inc. | United States | 6,648 | 38,758 | |
k Fibrocell Science, Inc. | United States | 7,408 | 30,373 | |
k Gilead Sciences, Inc. | United States | 6,413 | 479,757 | |
k Incyte Corp. Ltd. | United States | 6,913 | 322,146 | |
a,k Isis Pharmaceuticals, Inc. | United States | 6,366 | 246,746 | |
a,k KYTHERA Biopharmaceuticals, Inc. | United States | 780 | 30,404 | |
k MacroGenics, Inc. | United States | 388 | 10,270 | |
b,k Merrimack Pharmaceuticals, Inc. | United States | 16,331 | 64,344 | |
a,k OvaScience, Inc. | United States | 2,025 | 19,379 | |
k Portola Pharmaceuticals, Inc. | United States | 2,798 | 69,950 | |
Prothena Corp. PLC | Ireland | 1,510 | 42,627 | |
k PTC Therapeutics, Inc. | United States | 2,878 | 45,098 | |
a,k Puma Biotechnology, Inc. | United States | 2,466 | 122,782 | |
k QLT, Inc. | Canada | 2,052 | 11,450 | |
k Regulus Therapeutics, Inc. | United States | 1,408 | 8,856 | |
a,k Sangamo Biosciences, Inc. | United States | 4,676 | 57,094 | |
a,k Synta Pharmaceuticals Corp. | United States | 11,455 | 58,077 | |
a,k Targacept, Inc. | United States | 2,633 | 15,140 | |
k Tetraphase Pharmaceuticals, Inc. | United States | 2,824 | 33,210 | |
k TG Therapeutics, Inc. | United States | 1,785 | 7,872 | |
k Verastem, Inc. | United States | 1,959 | 20,726 | |
a,k Vertex Pharmaceuticals, Inc. | United States | 6,328 | 439,290 | |
k ZIOPHARM Oncology, Inc. | United States | 6,456 | 26,986 | |
4,501,238 | ||||
Capital Markets 0.2% | ||||
Lazard Ltd., A | United States | 3,600 | 150,228 | |
Chemicals 3.2% | ||||
a Air Products & Chemicals, Inc. | United States | 6,808 | 740,914 | |
a Airgas, Inc. | United States | 2,700 | 293,301 | |
BASF SE | Germany | 729 | 77,841 | |
The Dow Chemical Co. | United States | 487 | 19,022 | |
Eastman Chemical Co. | United States | 1,260 | 97,058 | |
a Ecolab, Inc. | United States | 3,200 | 342,944 | |
a PPG Industries, Inc. | United States | 633 | 116,510 | |
RockWood Holdings, Inc. | United States | 182 | 12,460 | |
a The Sherwin-Williams Co. | United States | 3,012 | 551,286 |
20 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Common Stocks and Other Equity Interests (continued) | ||||
Chemicals (continued) | ||||
Tronox Ltd., A | United States | 500 | $ | 10,625 |
a,k WR Grace & Co. | United States | 6,800 | 653,004 | |
2,914,965 | ||||
Commercial Banks 1.2% | ||||
Bank of Ayudhya PCL | Thailand | 72,192 | 86,558 | |
CIT Group, Inc. | United States | 4,143 | 209,139 | |
Commerzbank AG | Germany | 5,471 | 81,309 | |
Danske Bank AS | Denmark | 12,930 | 293,872 | |
HSBC Holdings PLC, ADR | United Kingdom | 145 | 8,134 | |
Intesa Sanpaolo SpA, di Risp | Italy | 42,243 | 84,072 | |
a Wells Fargo & Co. | United States | 8,000 | 352,160 | |
1,115,244 | ||||
Commercial Services & Supplies 0.9% | ||||
k EnerNOC, Inc. | United States | 10,323 | 177,039 | |
k Metalico, Inc. | United States | 6,500 | 11,440 | |
a Pitney Bowes, Inc. | United States | 4,100 | 94,997 | |
Tyco International Ltd. | United States | 13,067 | 498,376 | |
781,852 | ||||
Computers & Peripherals 0.4% | ||||
a Apple, Inc. | United States | 546 | 303,614 | |
EMC Corp. | United States | 840 | 20,034 | |
323,648 | ||||
Diversified Financial Services 1.2% | ||||
a,k Berkshire Hathaway, Inc., B | United States | 1,900 | 221,407 | |
b Citigroup, Inc. | United States | 6,679 | 353,453 | |
Gain Capital Holdings, Inc. | United States | 1,000 | 9,100 | |
a Moody’s Corp. | United States | 5,700 | 425,391 | |
Wisdomtree Japan Hedge Equity Fund, ETF | Japan | 2,304 | 115,914 | |
1,125,265 | ||||
Diversified Telecommunication Services 0.8% | ||||
AT&T, Inc. | United States | 500 | 17,605 | |
b Koninklijke KPN NV | Netherlands | 166,223 | 540,596 | |
Telecom Italia, SpA | Italy | 92,908 | 71,374 | |
k TW Telecom, Inc. | United States | 3,485 | 98,695 | |
b Verizon Communications, Inc. | United States | 395 | 19,600 | |
747,870 | ||||
Electrical Equipment 0.5% | ||||
Eaton Corp. PLC | Ireland | 2,577 | 187,245 | |
a Rockwell Automation, Inc. | United States | 2,522 | 286,449 | |
473,694 | ||||
Electronic Equipment, Instruments & Components 0.0%† | ||||
k Universal Display Corp. | United States | 1,000 | 36,110 |
Semiannual Report | 21
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Common Stocks and Other Equity Interests (continued) | ||||
Energy Equipment & Services 0.6% | ||||
a Halliburton Co. | United States | 3,209 | $ | 169,050 |
a Helmerich & Payne, Inc. | United States | 2,816 | 216,832 | |
Nabors Industries Ltd. | United States | 9,701 | 160,552 | |
546,434 | ||||
Food & Staples Retailing 2.0% | ||||
a Costco Wholesale Corp. | United States | 7,340 | 920,656 | |
CVS Caremark Corp. | United States | 190 | 12,723 | |
Dairy Farm International Holdings Ltd. | Hong Kong | 3,600 | 37,296 | |
a Wal-mart Stores, Inc. | United States | 5,514 | 446,689 | |
a Walgreen Co. | United States | 7,120 | 421,504 | |
1,838,868 | ||||
Food Products 0.4% | ||||
Lindt & Spruengli AG | Switzerland | 1 | 51,304 | |
a Mondelez International, Inc. | United States | 10,247 | 343,582 | |
394,886 | ||||
Gas 0.0%† | ||||
Tokyo Gas Co. Ltd., ADR | Japan | 362 | 7,218 | |
Health Care Equipment & Supplies 0.9% | ||||
a Abbott Laboratories | United States | 3,042 | 116,174 | |
a Becton Dickinson and Co. | United States | 3,400 | 369,206 | |
a,k Derma Sciences, Inc. | United States | 4,010 | 46,516 | |
k GenMark Diagnostics, Inc. | United States | 7,830 | 93,177 | |
k InspireMD, Inc. | United Kingdom | 6,873 | 19,519 | |
k Novadaq Technologies, Inc. | Canada | 3,926 | 65,368 | |
PW Medtech Group Ltd. | China | 28,766 | 13,358 | |
a St. Jude Medical, Inc. | United States | 1,702 | 99,431 | |
k Tandem Diabetes Care, Inc. | United States | 281 | 6,185 | |
a,k Tearlab Corp. | United States | 751 | 7,037 | |
Tornier NV | United States | 894 | 16,172 | |
852,143 | ||||
Health Care Providers & Services 2.0% | ||||
k Acadia Healthcare Co., Inc. | United States | 2,344 | 108,293 | |
Aetna, Inc. | United States | 2,725 | 187,834 | |
Celesio AG | Germany | 1,870 | 59,953 | |
k Centene Corp. | United States | 2,186 | 130,570 | |
a Cigna Corp. | United States | 2,094 | 183,120 | |
k Envision Healthcare Holdings, Inc. | United States | 948 | 28,080 | |
HCA Holdings, Inc. | United States | 5,977 | 277,452 | |
Health Management Associates, Inc. | United States | 12,880 | 168,599 | |
a,k Healthways, Inc. | United States | 8,059 | 112,907 | |
Mckesson Corp. | United States | 564 | 93,562 | |
k Molina Healthcare, Inc. | United States | 1,436 | 48,250 | |
a,k Premier, Inc. | United States | 869 | 28,599 | |
Rhoen-klinikum AG | Germany | 1,136 | 31,644 |
22 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Common Stocks and Other Equity Interests (continued) | ||||
Health Care Providers & Services (continued) | ||||
a Unitedhealth Group, Inc. | United States | 3,130 | $ | 233,122 |
a Universal Health Services, Inc. | United States | 1,914 | 157,771 | |
1,849,756 | ||||
Health Care Technology 0.0%† | ||||
Allscripts Healthcare Solutions, Inc. | United States | 2,046 | 30,567 | |
Hotels, Restaurants & Leisure 1.8% | ||||
a Domino’s Pizza, Inc. | United States | 5,200 | 359,476 | |
a Las Vegas Sands Corp. | United States | 5,680 | 407,143 | |
a McDonald’s Corp. | United States | 1,871 | 182,179 | |
a Starbucks Corp. | United States | 3,105 | 252,933 | |
Tim Hortons, Inc. | Canada | 734 | 42,502 | |
Wyndham Worldwide Corp. | United States | 6,403 | 459,159 | |
1,703,392 | ||||
Household Durables 0.7% | ||||
a,k NVR, Inc. | United States | 333 | 323,004 | |
Sharp Corp. | Japan | 7,000 | 22,895 | |
Sony Corp., ADR | Japan | 1,489 | 27,249 | |
Sony Corp. | Japan | 8,762 | 159,713 | |
The Ryland Group, Inc. | United States | 3,810 | 150,571 | |
683,432 | ||||
Household Products 0.3% | ||||
a Colgate-Palmolive Co. | United States | 3,800 | 250,078 | |
Industrial Conglomerates 0.1% | ||||
Jardine Matheson Holdings, Ltd. | Hong Kong | 1,600 | 80,832 | |
Jardine Strategic Holdings, Ltd. | Hong Kong | 1,000 | 32,050 | |
Siemens AG, ADR | Germany | 64 | 8,456 | |
121,338 | ||||
Insurance 0.1% | ||||
American International Group, Inc. | United States | 1,837 | 91,391 | |
Internet & Catalog Retail 0.5% | ||||
a,k Priceline.com, Inc. | United States | 390 | 465,009 | |
Internet Software & Services 0.7% | ||||
a.k Akamai Technologies, Inc. | United States | 3,149 | 140,823 | |
a,k Google, Inc., A | United States | 389 | 412,180 | |
k WebMD Health Corp. | United States | 1,686 | 65,198 | |
618,201 | ||||
IT Services 1.3% | ||||
a,k Fleetcor Technologies, Inc. | United States | 3,300 | 401,874 | |
Lender Processing Services | United States | 7,919 | 278,036 | |
a Mastercard, Inc. | United States | 700 | 532,567 | |
1,212,477 |
Semiannual Report | 23
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Common Stocks and Other Equity Interests (continued) | ||||
Leisure Equipment & Products 0.4% | ||||
a Polaris Industries, Inc. | United States | 2,908 | $ | 388,131 |
Life Sciences Tools & Services 0.8% | ||||
k Bruker Corp. | United States | 2,234 | 43,206 | |
k Fluidigm Corp. | United States | 2,948 | 93,687 | |
k Illumina, Inc. | United States | 1,438 | 140,924 | |
k Life Technologies Corp. | United States | 4,800 | 363,360 | |
a,k Quintiles Transnational Holdings, Inc. | United States | 252 | 10,884 | |
a,k WUXI PharmaTech Cayman Inc., ADR | China | 2,079 | 68,877 | |
720,938 | ||||
Machinery 0.8% | ||||
FANUC Corp. | Japan | 456 | 76,753 | |
a Parker Hannifin Corp. | United States | 1,640 | 193,257 | |
b Timken Co. | United States | 4,688 | 242,651 | |
a The Toro Co. | United States | 4,200 | 259,182 | |
771,843 | ||||
Media 2.6% | ||||
a Comcast Corp. | United States | 8,020 | 399,957 | |
a,b DISH Network Corp. | United States | 15,941 | 863,365 | |
Kabel Deutschland Holding AG | Germany | 92 | 11,998 | |
Liberty Global PLC, Series A | United Kingdom | 1,231 | 105,632 | |
Liberty Global PLC, Series C | United Kingdom | 1,108 | 90,247 | |
Sirius XM Holdings, Inc. | United States | 57,119 | 215,339 | |
a The Walt Disney Co. | United States | 4,300 | 303,322 | |
a,b Time Warner Cable, Inc. | United States | 2,752 | 380,381 | |
2,370,241 | ||||
Metals & Mining 0.0%† | ||||
k Horsehead Holding Corp. | United States | 200 | 2,994 | |
Multiline Retail 1.0% | ||||
a,k Burlington Stores, Inc. | United States | 1,100 | 31,284 | |
a,k Dollar General Corp. | United States | 7,560 | 430,466 | |
a Macy’s, Inc. | United States | 9,223 | 491,217 | |
952,967 | ||||
Office / Business Equipment 0.0%† | ||||
Canon Inc., ADR | Japan | 125 | 4,165 | |
Oil, Gas & Consumable Fuels 1.0% | ||||
a Berry Petroleum Co., A | United States | 3,694 | 185,882 | |
Chevron Corp. | United States | 136 | 16,652 | |
Exxon Mobil Corp. | United States | 185 | 17,294 | |
Hess Corp. | United States | 5,664 | 459,520 | |
a Occidental Petroleum Corp. | United States | 1,650 | 156,684 | |
Royal Dutch Shell PLC, A | United Kingdom | 2,391 | 79,986 | |
Royal Dutch Shell PLC, ADR | United Kingdom | 186 | 12,406 |
24 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Common Stocks and Other Equity Interests (continued) | ||||
Oil, Gas & Consumable Fuels (continued) | ||||
Statoil ASA, ADR | Norway | 354 | $ | 7,979 |
Total SA, ADR | France | 270 | 16,287 | |
952,690 | ||||
Pharmaceuticals 2.5% | ||||
Actavis PLC | United States | 738 | 120,346 | |
k Aerie Pharmaceuticals, Inc. | United States | 986 | 11,093 | |
a Allergan, Inc. | United States | 1,436 | 139,364 | |
a,k Aratana Therapeutics, Inc. | United States | 1,298 | 25,700 | |
Bayer AG | Germany | 131 | 17,489 | |
Bristol-Myers Squibb Co. | United States | 6,873 | 353,135 | |
CFR Pharmaceuticals SA | Chile | 458,867 | 103,300 | |
k Corcept Therapeutics, Inc. | United States | 7,993 | 17,185 | |
Eli Lilly & Co. | United States | 397 | 19,937 | |
GlaxoSmithKline PLC, ADR | United Kingdom | 161 | 8,520 | |
Johnson & Johnson | United States | 170 | 16,092 | |
Merck & Co., Inc. | United States | 3,702 | 184,471 | |
k Mylan, Inc. | United States | 3,676 | 162,222 | |
Novo Nordisk AS, ADR | Denmark | 422 | 75,424 | |
k Pacira Pharmaceuticals, Inc. | United States | 2,772 | 152,987 | |
a Perrigo Co. PLC | United States | 1,109 | 172,882 | |
a Pfizer, Inc. | United States | 3,728 | 118,289 | |
k Repros Therapeutics, Inc. | United States | 4,539 | 77,844 | |
Roche Holding AG | Switzerland | 1,040 | 289,931 | |
Roche Holdings Ltd., ADR | Switzerland | 175 | 12,259 | |
k Sagent Pharmaceuticals, Inc. | United States | 919 | 20,870 | |
Sanofi, ADR | France | 240 | 12,679 | |
k The Medicines Co. | United States | 3,841 | 140,619 | |
a,k XenoPort, Inc. | United States | 1,909 | 10,194 | |
Zoetis, Inc. | United States | 1,543 | 48,064 | |
2,310,896 | ||||
Professional Services 0.5% | ||||
a,k Verisk Analytics, Inc. | United States | 6,300 | 410,193 | |
Real Estate Investment Trusts (REITs) 0.5% | ||||
American Tower Corp. | United States | 1,488 | 115,722 | |
Mid-America Apartment Communities, Inc. | United States | 2,217 | 133,552 | |
Weyerhaeuser Co. | United States | 7,485 | 225,523 | |
474,797 | ||||
Real Estate Management & Development 0.7% | ||||
a,k CBRE Group, Inc. | United States | 14,346 | 347,747 | |
k Realogy Holdings Corp. | United States | 5,750 | 272,493 | |
620,240 |
Semiannual Report | 25
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Common Stocks and Other Equity Interests (continued) | ||||
Road & Rail 1.5% | ||||
a,k Hertz Global Holdings, Inc. | United States | 20,408 | $ | 495,098 |
a JB Hunt Transport Services, Inc. | United States | 3,095 | 232,713 | |
a Union Pacific Corp. | United States | 4,127 | 668,739 | |
1,396,550 | ||||
Semiconductors & Semiconductor Equipment 0.3% | ||||
Avago Technologies Ltd. | United States | 2,030 | 90,802 | |
KLA-Tencor Corp. | United States | 130 | 8,303 | |
NXP Semiconductors NV | Netherlands | 3,883 | 165,027 | |
Texas Instruments, Inc. | United States | 396 | 17,028 | |
281,160 | ||||
Software 0.5% | ||||
k Adobe Systems, Inc. | United States | 3,094 | 175,678 | |
k Broadsoft, Inc. | United States | 2,000 | 53,140 | |
b Microsoft Corp. | United States | 7,156 | 272,858 | |
501,676 | ||||
Specialty Retail 1.1% | ||||
a CST Brands, Inc. | United States | 4,451 | 146,393 | |
b,k Jos A Bank Clothiers, Inc. | United States | 1,090 | 61,934 | |
a The Home Depot, Inc. | United States | 4,595 | 370,679 | |
a Tiffany & Co. | Unites States | 4,600 | 410,044 | |
989,050 | ||||
Telecommunication Services 0.0%† | ||||
b Alcatel-Lucent, rts., 12/03/13 | France | 26,750 | 7,631 | |
Textiles, Apparel & Luxury Goods 0.7% | ||||
Carter’s, Inc. | United States | 1,297 | 91,659 | |
Cie Financiere Richemont SA | Switzerland | 1,611 | 163,686 | |
Hermes International | France | 100 | 34,913 | |
Luxottica Group, SpA | Italy | 2,410 | 127,619 | |
k Under Armour, Inc. | United States | 2,400 | 193,680 | |
611,557 | ||||
Thrifts & Mortgage Finance 0.0%† | ||||
k Fannie Mae | United States | 6,000 | 15,900 | |
Tobacco 0.0%† | ||||
Altria Group, Inc. | United States | 338 | 12,499 | |
British American Tobacco PLC, ADR | United Kingdom | 77 | 8,187 | |
Philip Morris International, Inc. | United States | 94 | 8,041 | |
28,727 | ||||
Trading Companies & Distributors 0.0%† | ||||
Mitsubishi Corp., ADR | Japan | 297 | 11,726 | |
Mitsui & Co. Ltd., ADR | Japan | 41 | 11,393 | |
23,119 |
26 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Common Stocks and Other Equity Interests (continued) | ||||
Wireless Telecommunications Services 2.0% | ||||
k Crown Castle International Corp. | United States | 4,003 | $ | 297,143 |
k Leap Wireless International, Inc. | United States | 11,144 | 185,102 | |
k SBA Communications Corp. | United States | 1,795 | 152,880 | |
k Sprint Corp. | United States | 33,363 | 279,916 | |
k T-Mobile US, Inc. | United States | 14,695 | 382,217 | |
b Vodafone Group PLC, ADR | United Kingdom | 14,725 | 546,150 | |
1,843,408 | ||||
Total Common Stocks and Other Equity Interests | ||||
(Cost $43,468,411) | 45,881,955 | |||
Preferred Stocks 2.7% | ||||
Aerospace & Defense 0.0%† | ||||
Rolls-Royce Holdings PLC, C | United Kingdom | 838,500 | 1,373 | |
Agriculture 0.1% | ||||
Bunge Ltd., 4.875%, cvt. | United States | 700 | 74,550 | |
Banks 0.3% | ||||
k National Bank Greece SA, 9.00% | Greece | 563 | 8,406 | |
l Royal Bank of Scotland Group PLC, perpetual, junior sub. note, | ||||
Series L, 5.75% | United Kingdom | 10,000 | 202,500 | |
Series M, 5.75% | United Kingdom | 949 | 20,565 | |
Series N, 6.35% | United Kingdom | 491 | 10,552 | |
Series P, 6.25% | United Kingdom | 40 | 847 | |
Series R, 6.125% | United Kingdom | 124 | 2,585 | |
Series S, 6.60% | United Kingdom | 347 | 7,745 | |
253,200 | ||||
Energy 0.0%† | ||||
Dominion Resources, Inc., 6.125%, cvt., A | United States | 368 | 20,181 | |
Food Products 0.1% | ||||
Post Holdings, Inc., 3.75%, cvt., b | United States | 750 | 91,222 | |
Insurance 0.2% | ||||
Maiden Holding Ltd., 7.25%, cvt., A | United States | 1,350 | 67,999 | |
Metlife, Inc., 5.00%, cvt. | United States | 3,000 | 92,580 | |
160,579 | ||||
Machinery 0.0%† | ||||
Stanley Black & Decker, Inc., 6.25% | United States | 600 | 61,200 | |
Metals & Mining 0.0%† | ||||
ArcelorMittal, 6.00%, cvt. | Luxembourg | 825 | 20,831 | |
Cliffs Natural Resources, Inc., 7.00%, cvt. | United States | 491 | 10,783 | |
31,614 |
Semiannual Report | 27
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares/Rights | Value | |
Preferred Stocks (continued) | ||||
Oil, Gas & Consumable Fuels 0.4% | ||||
c Chesapeake Energy Corp., 144A, 5.75%, cvt. | United States | 17 | $ | 19,529 |
c,k Sanchez Energy Corp., 144A, 6.50%, cvt., B | United States | 4,900 | 332,122 | |
Sandridge Energy, Inc., 7.00%, cvt. | United States | 75 | 7,083 | |
358,734 | ||||
Real Estate 0.2% | ||||
k Forestar Group, Inc., 6.00% | United States | 6,000 | 158,160 | |
REITs 0.6% | ||||
a Health Care REIT, Inc., 6.50%, cvt. | United States | 7,330 | 395,087 | |
istar Financial, Inc., 4.50% | United States | 415 | 24,228 | |
Weyerhaeuser Co., 6.375%, cvt., A | United States | 2,310 | 126,634 | |
545,949 | ||||
Thrifts & Mortgage Finance 0.2% | ||||
k Fannie Mae, 8.25% | United States | 2,000 | 16,300 | |
k Freddie Mac, 8.375% | United States | 18,256 | 152,072 | |
168,372 | ||||
Tobacco 0.6% | ||||
Universal Corp., 6.75%, cvt. | United States | 475 | 570,000 | |
Wireless Telecommunications Service 0.0%† | ||||
Crown Castle International Corp., 4.50%, cvt., A | United States | 83 | 8,383 | |
Total Preferred Stocks (Cost $2,523,509) | 2,503,517 | |||
Principal Amount* | ||||
Convertible Bonds 14.2% | ||||
Aerospace & Defense 0.3% | ||||
Aar Corp., senior note, 2.25%, 3/01/16 | United States | 100,000 | 110,313 | |
a,d L-3 Communications Holdings, Inc., senior bond, FRN, 3.00%, 8/01/35 | United States | 100,000 | 117,625 | |
227,938 | ||||
Airlines 0.6% | ||||
a Hawaiian Holdings, Inc., senior note, 5.00%, 3/15/16 | United States | 400,000 | 529,000 | |
Automobiles 0.1% | ||||
c Navistar International Corp., senior sub. note, 144A, 4.50%, 10/15/18 | United States | 100,000 | 105,500 | |
Biotechnology 0.8% | ||||
Biomarin Pharmaceutical, Inc., senior sub. bond, 0.75%, 10/15/18 | United States | 8,000 | 8,525 | |
Biomarin Pharmaceutical, Inc., senior sub. note, 1.50%, 10/15/20 | United States | 108,000 | 117,382 | |
c Cubist Pharmaceuticals, Inc., senior note, 144A, 1.875%, 9/01/20 | United States | 100,000 | 112,375 | |
Gilead Sciences, Inc., senior note, 1.625%, 5/01/16 | United States | 13,000 | 42,762 | |
Intermune, Inc., senior note, 2.50%, 9/15/18 | United States | 45,000 | 40,163 | |
b Merrimack Pharmaceuticals, senior note, 4.50%, 7/15/20 | United States | 500,000 | 422,187 | |
Mylan, Inc., senior note, 3.75%, 9/15/15 | United States | 7,000 | 23,393 | |
766,787 |
28 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | |
Convertible Bonds (continued) | ||||
Capital Markets 0.8% | ||||
a,c Ares Capital Corp., senior note, 144A, 4.375%, 1/15/19 | United States | 500,000 | $ | 513,437 |
c Prospect Capital Corp., senior note, 144A, 5.875%, 1/15/19 | United States | 100,000 | 104,250 | |
Walter Investment Management Corp., senior sub. bond, 4.50%, | ||||
11/01/19 | United States | 100,000 | 104,188 | |
721,875 | ||||
Communications Equipment 0.1% | ||||
Ciena Corp., | ||||
senior bond, 0.875%, 6/15/17 | United States | 100,000 | 99,688 | |
c senior note, 144A, 3.75%, 10/15/18 | United States | 14,000 | 19,311 | |
118,999 | ||||
Computers & Peripherals 0.1% | ||||
EMC Corp., senior note, 1.75%, 12/01/13 | United States | 75,000 | 111,242 | |
Consumer Finance 0.1% | ||||
c Portfolio Recovery Associates, Inc., senior note, 144A, 3.00%, | ||||
8/01/20 | United States | 100,000 | 116,187 | |
Construction Materials 0.1% | ||||
Cemex Sab De CV, sub. note, 3.25%, 3/15/16 | Mexico | 100,000 | 125,500 | |
Diversified Consumer Services 0.1% | ||||
Ascent Capital Group Inc., senior note, 4.00%, 7/15/20 | United States | 100,000 | 108,188 | |
Electrical Equipment 0.2% | ||||
d General Cable Corp., sub bond, 5.00%, 11/15/29 | United States | 100,000 | 106,813 | |
SolarCity Corp., senior note, 2.75%, 11/01/18 | United States | 100,000 | 113,687 | |
220,500 | ||||
Electronic Equipment & Instruments 0.6% | ||||
c Invensense, Inc., senior note, 144A, 1.75%, 11/01/18 | United States | 50,000 | 52,344 | |
a,c Vishay Intertechnology, Inc., senior bond, 144A, 2.25%, 11/15/40 | United States | 500,000 | 525,000 | |
577,344 | ||||
Energy & Equipment Services 0.1% | ||||
Hornbeck Offshore Services, Inc., senior note, 1.50%, 9/01/19 | United States | 15,000 | 18,169 | |
c Seacor Holdings, senior bond, 144A, 3.00%, 11/15/28 | United States | 50,000 | 50,188 | |
68,357 | ||||
Health Care Equipment & Supplies 0.5% | ||||
Accuray, Inc., senior note, 3.75%, 8/01/16 | United States | 100,000 | 108,500 | |
d Hologic, Inc., senior bond, FRN, 2.00%, 12/15/43 | United States | 100,000 | 105,812 | |
d Hologic, Inc., senior bond, FRN, 2.00%, 3/01/42 | United States | 20,000 | 20,475 | |
a Nuvasive, Inc., senior note, 2.75%, 7/01/17 | United States | 150,000 | 164,250 | |
Volcano Corp., senior note, 1.75%, 12/01/17 | United States | 100,000 | 100,313 | |
499,350 | ||||
Health Care Providers & Services 1.4% | ||||
c Healthways, Inc., senior note, 144A, 1.50%, 7/01/18 | United States | 150,000 | 141,750 | |
Lifepoint Hospitals, Inc., senior sub. note, 3.50%, 5/15/14 | United States | 100,000 | 108,000 |
Semiannual Report | 29
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | |
Convertible Bonds (continued) | ||||
Health Care Providers & Services (continued) | ||||
c Molina Healthcare, Inc., senior note, 144A, 1.125%, 1/15/20 | United States | 400,000 | $ | 418,500 |
Omnicare, Inc., Co., senior sub. bond, 3.75%, 4/01/42 | United States | 350,000 | 508,594 | |
Omnicare, Inc., senior sub. bond, 3.50%, 2/15/44 | United States | 100,000 | 98,750 | |
1,275,594 | ||||
Household Durables 0.3% | ||||
KB Home, Co., senior note, 1.375%, 2/01/19 | United States | 100,000 | 99,312 | |
Meritage Homes Corp., senior bond, 1.875%, 9/15/32 | United States | 60,000 | 65,400 | |
Toll Bros Finance Corp., senior bond, 0.50%, 9/15/32 | United States | 100,000 | 102,625 | |
267,337 | ||||
Household Products 0.1% | ||||
a,cJarden Corp., Co., senior sub. note, 144A, 1.50%, 6/15/19 | United States | 100,000 | 115,687 | |
Internet & Catalog Retail 0.1% | ||||
Priceline.com, Inc., senior note, 1.00%, 3/15/18 | United States | 9,000 | 12,679 | |
c Priceline.com, Inc., senior note, 144A, 0.35%, 6/15/20 | United States | 100,000 | 114,938 | |
127,617 | ||||
Internet Software & Services 0.2% | ||||
a,c Blucora, Inc., senior note, 144A, 4.25%, 4/01/19 | United States | 75,000 | 111,281 | |
Web.com Group, Inc., senior note, 1.00%, 8/15/18 | United States | 100,000 | 106,875 | |
218,156 | ||||
IT Services 0.1% | ||||
c Servicesource International, Inc., 144A, senior note, 1.50%, 8/01/18 | United States | 50,000 | 48,750 | |
Life Sciences Tools & Services 0.2% | ||||
c Albany Molecular Research Inc., senior note, 144A, 2.25%, 11/15/18 | United States | 160,000 | 164,600 | |
Machinery 0.1% | ||||
c Meritor, Inc., 144A, senior bond, 7.875%, 3/01/26 | United States | 85,000 | 106,941 | |
Marine 0.1% | ||||
Dryships, Inc., senior bond, 5.00%, 12/01/14 | Greece | 75,000 | 73,359 | |
Media 0.6% | ||||
c Liberty Media Corp., senior bond, 144A, 1.375%, 10/15/23 | United States | 500,000 | 519,375 | |
Metals & Mining 0.2% | ||||
Ak Steel Corp., senior note, 5.00%, 11/15/19 | United States | 75,000 | 93,984 | |
RTI International Metals Inc., senior note, 1.625%, 10/15/19 | United States | 100,000 | 107,625 | |
201,609 | ||||
Oil, Gas & Consumable Fuels 1.1% | ||||
c Alon USA Energy, Inc., senior note, 144A, 3.00%, 9/15/18 | United States | 100,000 | 115,125 | |
a BPZ Resources, Inc., senior note, 8.50%, 10/01/17 | United States | 400,000 | 375,500 | |
Chesapeake Energy Corp., senior bond, 2.75%, 11/15/35 | United States | 100,000 | 105,812 | |
Cobalt International Energy, Inc., senior note, 2.625%, 12/01/19 | United States | 100,000 | 100,437 | |
Goodrich Petroleum Corp., senior bond, 5.00%, 10/01/32 | United States | 75,000 | 78,656 | |
c Green Plains Renewable Energy, Inc., senior note, 144A, 3.25%, | ||||
10/01/18 | United States | 100,000 | 109,125 |
30 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | ||
Convertible Bonds (continued) | |||||
Oil, Gas & Consumable Fuels (continued) | |||||
d Peabody Energy Corp., junior sub. bond, FRN, 4.75%, 12/15/41 | United States | 75,000 | $ | 60,563 | |
Stone Energy Corp., senior note, 1.75%, 3/01/17 | United States | 50,000 | 54,219 | ||
c Vantage Drilling Co., 144A, 5.50%, 7/15/43 | United States | 30,000 | 32,700 | ||
1,032,137 | |||||
Pharmaceuticals 0.3% | |||||
Array Bio, Inc., senior note, 3.00%, 6/01/20 | United States | 100,000 | 111,375 | ||
Auxilium Pharmaceuticals, Inc., senior note, 1.50%, 7/15/18 | United States | 100,000 | 109,750 | ||
221,125 | |||||
Professional Services 1.0% | |||||
a,c CBIZ, Inc., senior sub. note, 144A, 4.875%, 10/01/15 | United States | 700,000 | 927,062 | ||
Real Estate Investment Trusts (REITs) 1.5% | |||||
c American Residential Properties Op LP, Co., senior note, 144A, 3.25%, | |||||
11/15/18 | United States | 100,000 | 103,563 | ||
a Annaly Capital Management, Inc., senior note, 5.00%, 5/15/15 | United States | 475,000 | 481,828 | ||
c Campus Crest Communities Operating Partnership LP, Co., senior note, | |||||
144A, 4.75%, 10/15/18 | United States | 100,000 | 102,125 | ||
Colony Financial, Inc., senior bond, 5.00%, 4/15/23 | United States | 100,000 | 103,625 | ||
c Northstar Realty Finance LP, Co., senior bond, 144A, 5.375%, 6/15/33 | United States | 100,000 | 107,125 | ||
Rait Financial Trust, senior bond, 7.00%, 4/01/31 | United States | 100,000 | 132,875 | ||
Redwood Trust, Inc., senior note, 4.625%, 4/15/18 | United States | 100,000 | 103,313 | ||
Resource Capital Corp., senior note, 6.00%, 12/01/18 | United States | 100,000 | 100,875 | ||
Starwood Property Trust, Inc., senior note, 4.55%, 3/01/18 | United States | 100,000 | 110,187 | ||
1,345,516 | |||||
Real Estate Management & Development 0.1% | |||||
c Forest City Enterprises, Inc., senior note, 144A, 3.625%, 8/15/20 | United States | 100,000 | 103,750 | ||
Semiconductors & Semiconductor Equipment 0.7% | |||||
a Intel Corp., junior sub. bond, 2.95%, 12/15/35 | United States | 100,000 | 108,750 | ||
Micron Technology, Inc., senior bond, | |||||
2.375%, 5/01/32 | United States | 5,000 | 11,266 | ||
3.125%, 5/01/32 | United States | 55,000 | 122,547 | ||
3.00%, 11/15/43 | United States | 250,000 | 239,844 | ||
c Nvidia Corp., senior note, 144A, 1.00%, 12/01/18 | United States | 150,000 | 150,937 | ||
Xilinx, Inc., senior note, 2.625%, 6/15/17 | United States | 10,000 | 15,631 | ||
648,975 | |||||
Software 0.7% | |||||
a,c Concur Technologies, Inc., senior note, 144A, 0.50%, 6/15/18 | United States | 250,000 | 279,844 | ||
Electronic Arts, Inc., senior note, 0.75%, 7/15/16 | United States | 100,000 | 104,187 | ||
c Netsuite, Inc., senior note, 144A, 0.25%, 6/01/18 | United States | 90,000 | 96,187 | ||
a Take-two Interactive Software, Inc., senior bond, 1.00%, 7/01/18 | United States | 150,000 | 157,594 | ||
637,812 | |||||
Textiles, Apparel & Luxury Goods 0.6% | |||||
c Iconix Brand Group, Inc., senior sub. note, 144A, 1.50%, 3/15/18 | United States | 400,000 | 549,000 | ||
Thrift & Mortgage Finance 0.1% | |||||
c MGIC Investment Corp., junior sub. bond, 144A, 9.00%, 4/01/63 | United States | 100,000 | 115,125 | ||
Semiannual Report | 31 |
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | |||||
Convertible Bonds (continued) | ||||||||
Tobacco 0.1% | ||||||||
d Vector Group Ltd., senior bond, 2.50%, 1/15/19 | United States | 40,000 | $ | 47,326 | ||||
Transportation Infrastructure 0.1% | ||||||||
Aegean Marine Petroleum, senior note, 4.00%, 11/01/18 | Greece | 100,000 | 104,813 | |||||
Total Convertible Bonds (Cost $12,887,767) | 13,148,433 | |||||||
Corporate Bonds, Notes and Senior Floating Rate | ||||||||
Interests 18.0% | ||||||||
Aerospace & Defense 0.5% | ||||||||
d Accudyne Industries LLC (Silver II U.S. Holdings/Hamilton), 2013 | ||||||||
Specified Refinancing Term Loan, first lien, senior secured, FRN, | ||||||||
4.00%, 12/13/19 | United States | 41,000 | 41,074 | |||||
c Erickson Air-crane, Inc., secured note, second lien, 144A, 8.25%, | ||||||||
5/01/20 | United States | 350,000 | 358,312 | |||||
Transdigm, Inc., first lien, senior secured, Tranche C Term Loan, 3.75%, | ||||||||
2/28/20 | United States | 20,000 | 20,132 | |||||
419,518 | ||||||||
Automobiles 0.1% | ||||||||
Ford Motor Co., 4.25%, 11/15/16 | United States | 20,000 | 40,563 | |||||
c General Motors Co., senior bond, 144A, 4.875%, 10/02/23 | United States | 60,000 | 60,675 | |||||
101,238 | ||||||||
Banks 0.1% | ||||||||
c Dresdner Funding Trust I, junior sub. bond, 144A, 8.151%, 6/30/31 | Germany | 100,000 | 103,500 | |||||
HSH Nordbank AG, junior sub. bond, 7.408%, 6/29/49 | Germany | 10,000 | EUR | 3,950 | ||||
107,450 | ||||||||
Beverages 0.1% | ||||||||
d Coca-Cola Co., FRN, senior note, 0.342%, 11/01/16 | United States | 80,000 | 80,151 | |||||
c Crestview DS Merger Sub II Inc., second lien, Term Loan, secured note, | ||||||||
144A, 10.00%, 9/01/21 | United States | 35,000 | 37,275 | |||||
117,426 | ||||||||
Building Products 0.0%† | ||||||||
c USG Corp., senior note, 144A, 5.875%, 11/01/21 | United States | 40,000 | 41,450 | |||||
Chemicals 0.7% | ||||||||
d Chemtura, FRN, first lien, senior secured note, 3.50%, 8/27/16 | United States | 20,000 | 20,112 | |||||
Hexion US Finance Corp., first lien, senior secured note, 8.875%, | ||||||||
2/01/18 | United States | 550,000 | 574,063 | |||||
d Monsanto Co., FRN, senior note, 0.438%, 11/07/16 | United States | 40,000 | 40,064 | |||||
634,239 | ||||||||
Commercial Banks 0.4% | ||||||||
Royal Bank of Scotland Group PLC, junior sub. bond, 5.25%, 6/29/49 | United Kingdom | 71,000 | EUR | 80,779 | ||||
l Royal Bank of Scotland Group PLC, 5.50%, perpetual | United Kingdom | 17,000 | EUR | 19,757 | ||||
Royal Bank of Scotland Group PLC, sub. bond, 6.125%, 12/15/22 | United Kingdom | 75,000 | 76,660 | |||||
Unicredit, SpA, senior note, 6.95%, 10/31/22 | Italy | 100,000 | EUR | 148,635 | ||||
325,831 | ||||||||
32 | | | Semiannual Report |
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | ||
Corporate Bonds, Notes and Senior Floating Rate | |||||
Interests (continued) | |||||
Commercial Services & Supplies 1.1% | |||||
Garda Security, 4.00%, 11/06/20 | United States | 15,926 | $ | 16,042 | |
Harland Clarke, 7.00%, 5/22/18 | United States | 20,000 | 20,082 | ||
Ipayment, Inc., Co., senior note, 10.25%, 5/15/18 | United States | 250,000 | 200,000 | ||
TMS International, 4.50%, 10/04/20 | United States | 20,000 | 20,083 | ||
c Wyle Services Corp., senior sub. note, 144A, 10.50%, 4/01/18 | United States | 744,000 | 721,680 | ||
977,887 | |||||
Computers & Peripherals 0.0%† | |||||
Dell, Inc., senior note, 4.50%, 3/24/20 | United States | 20,000 | 19,841 | ||
SanDisk Corp., senior note, 1.50%, 8/15/17 | United States | 11,000 | 15,806 | ||
35,647 | |||||
Diversified Financial Services 0.9% | |||||
d Bank of America Corp., senior note, FRN, 1.281%, 1/15/19 | United States | 20,000 | 20,084 | ||
d Duff & Phelps, first lien, senior secured note, FRN, 4.50%, 4/23/20 | United States | 40,000 | 40,050 | ||
d Ford Motor Credit Co. LLC, senior note, FRN, 0.992%, 1/17/17 | United States | 40,000 | 40,166 | ||
l General Electric Capital Corp., junior sub., 7.125%, perpetual | United States | 100,000 | 111,430 | ||
PHH Corp., senior note, 6.375%, 8/15/21 | United States | 250,000 | 252,812 | ||
c ROC Finance LLC/ROC Finance 1 Corp., secured note, 144A, 12.125%, | |||||
9/01/18 | United States | 300,000 | 303,750 | ||
SLM Corp., senior bond, 8.00%, 3/25/20 | United States | 20,000 | 22,775 | ||
791,067 | |||||
Diversified Telecommunication Services 1.1% | |||||
c Avaya, Inc., secured note, second lien, 144A, 10.50%, 3/01/21 | United States | 350,000 | 318,500 | ||
d Cincinnati Bell, first lien, senior secured, FRN, 4.00%, 9/10/20 | United States | 20,000 | 20,018 | ||
d Crown Castle Operating Co., New Tranche B Term Loan, 6.50%, FRN, | |||||
1/31/19 | United States | 20,000 | 20,010 | ||
Frontier Communications Corp., senior bond, 9.00%, 8/15/31 | United States | 550,000 | 556,875 | ||
c Level 3 Financing, Inc., 144A, 6.125%, 1/15/21 | United States | 14,000 | 14,245 | ||
Telecom Italia SpA, senior note, 6.375%, 6/24/19 | Italy | 50,000 | GBP | 85,205 | |
1,014,853 | |||||
Electrical Equipment 0.0%† | |||||
d Generac Power Systems, Inc., first lien, senior secured, FRN, 3.50%, | |||||
5/31/20 | United States | 20,000 | 20,050 | ||
Energy 0.6% | |||||
d Calpine, FRN, first lien, senior secured, 3.00%, 5/03/20 | United States | 21,000 | 20,831 | ||
c Energy Future, second lien, security lien, 144A, 12.25%, 3/01/22 | United States | 450,000 | 524,250 | ||
545,081 | |||||
Energy Equipment & Services 0.0%† | |||||
c Hercules Offshore, Inc., senior note, 144A, 7.50%, 10/01/21 | United States | 40,000 | 42,200 | ||
Entertainment 0.2% | |||||
Digital Cinema, 3.25%, 5/17/21 | United States | 40,000 | 40,000 | ||
c GLP Capital LP, senior note, 144A, 4.375%, 11/01/18 | United States | 80,000 | 81,800 | ||
Warner Music, 3.75%, 7/01/20 | United States | 20,000 | 20,031 | ||
141,831 | |||||
Semiannual Report | 33 |
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | ||
Corporate Bonds, Notes and Senior Floating Rate | |||||
Interests (continued) | |||||
Food Products 0.1% | |||||
Arby’s, 5.00%, 11/13/20 | United States | 25,000 | $ | 25,133 | |
d Pinnacle Foods, first lien, senior secured, FRN, 3.25%, 4/29/20 | United States | 40,000 | 40,021 | ||
d Reddy Ice Corp., first lien, senior secured, FRN, 6.75%, 4/01/19 | United States | 10,000 | 9,994 | ||
d US Food Service, first lien guaranteed, senior secured, FRN, 4.50%, | |||||
3/31/19 | United States | 20,000 | 20,108 | ||
95,256 | |||||
Health Care Equipment & Supplies 0.7% | |||||
Accellent, Inc., Co., senior sub. note, 10.00%, 11/01/17 | United States | 679,000 | 681,546 | ||
Health Care Providers & Services 1.0% | |||||
Community Health Systems, Inc., Co., senior note, 7.125%, 7/15/20 | United States | 350,000 | 362,687 | ||
Health Management Associates, note, 7.375%, 1/15/20 | United States | 150,000 | 168,750 | ||
c MedImpact Holdings, Inc., senior secured note, 144A, 10.50%, | |||||
2/01/18 | United States | 300,000 | 331,500 | ||
WellCare Health Plans, Inc., senior note, 5.75%, 11/15/20 | United States | 17,000 | 17,553 | ||
880,490 | |||||
Home Furnishings 0.0%† | |||||
d Tempur Pedic, FRN, first lien, senior secured, 3.50%, 3/18/20 | United States | 40,000 | 40,038 | ||
Hotels, Restaurants & Leisure 1.9% | |||||
Caesars Entertainment Resort Properties LLC, | |||||
c senior secured note, first lien, 144A, 8.00%, 10/01/20 | United States | 250,000 | 256,875 | ||
c secured note, second lien, 144A, 11.00%, 10/01/21 | United States | 523,000 | 524,307 | ||
c Downstream Development Authority of the Quapaw Tribe of Oklahoma, | |||||
senior secured note, 144A, 10.50%, 7/01/19 | United States | 250,000 | 252,188 | ||
Harrahs Operating Co., Inc., 5.625%, 6/01/15 | United States | 400,000 | 398,000 | ||
d Hilton Worldwide Finance LLC, first lien guaranteed, senior secured, FRN, | |||||
4.00%, 10/25/20 | United States | 19,737 | 19,828 | ||
c Sugarhouse HSP Gaming Prop Mezzanine LP, secured note, 144A, | |||||
6.375%, 6/01/21 | United States | 300,000 | 285,750 | ||
1,736,948 | |||||
Household Durables 0.0% | |||||
KB Home, Co., senior note, 7.00%, 12/15/21 | United States | 30,000 | 31,050 | ||
Household Products 0.7%† | |||||
c American Achievement Corp., second lien, secured note, 144A, | |||||
10.875%, 4/15/16 | United States | 500,000 | 531,875 | ||
d Procter & Gamble Co., senior note, FRN, 0.322%, 11/04/16 | United States | 80,000 | 80,105 | ||
d Wilsonart International Holding LLC, first lien, senior secured, FRN, 4.00%, | |||||
10/31/19 | United States | 20,000 | 19,800 | ||
631,780 | |||||
Insurance 0.3% | |||||
d AmWins first lien, senior secured, FRN, 5.00%, 9/06/19 | United States | 40,000 | 40,220 | ||
d Assicurazioni Generali, SpA, FRN, 7.75%, 12/12/42 | Italy | 100,000 | EUR | 155,892 |
34 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | ||
Corporate Bonds, Notes and Senior Floating Rate | |||||
Interests (continued) | |||||
Insurance (continued) | |||||
Cooper Gay Swett, 5.00%, 4/16/20 | United States | 36,000 | $ | 35,632 | |
Renaissance, 5.00%, 10/16/20 | United States | 20,000 | 20,100 | ||
251,844 | |||||
Leisure Equipment & Products 0.4% | |||||
d Sram Cov-lite, first lien, guaranteed senior secured, FRN, 4.00%, | |||||
4/10/20 | United States | 40,000 | 39,950 | ||
Travelport LLC, | |||||
senior sub. note, 10.875%, 9/01/16 | United States | 100,000 | EUR | 136,868 | |
senior sub. note, 11.875%, 9/01/16 | United States | 150,000 | 152,625 | ||
329,443 | |||||
Media 2.5% | |||||
American Media, Inc., senior secured note, first lien, 11.50%, | |||||
12/15/17 | United States | 550,000 | 602,250 | ||
CCO Holdings LLC, | |||||
csenior bond, 144A, 5.75%, 9/01/23 | United States | 400,000 | 379,000 | ||
senior bond, 5.75%, 1/15/24 | United States | 100,000 | 94,500 | ||
d Charter Communications Operating LLC, first lien guaranteed, | |||||
senior secured, FRN, 3.00%, 7/01/20 | United States | 20,000 | 19,782 | ||
Clear Channel Communications Inc., | |||||
csenior note, 144A, 14.00%, 2/01/21 | United States | 96,000 | 85,920 | ||
senior note, 5.50%, 9/15/14 | United States | 185,000 | 184,075 | ||
d,e CSC Holdings LLC, first lien senior secured, FRN, 2.668%, 4/17/20 | United States | 20,000 | 19,811 | ||
Getty Images, 4.75%, 10/18/19 | United States | 10,000 | 9,287 | ||
Sinclair Television, 3.00%, 4/15/20 | United States | 40,000 | 39,591 | ||
The Mcclatchy Co., senior secured note, first lien, 9.00%, 12/15/22 | United States | 300,000 | 327,000 | ||
Postmedia Network, Inc., senior secured note, second lien, 12.50%, | |||||
7/15/18 | Canada | 500,000 | 560,000 | ||
2,321,216 | |||||
Metals & Mining 0.0%† | |||||
US Steel Corp., senior note, 2.75%, 4/01/19 | United States | 10,000 | 12,400 | ||
Oil, Gas & Consumable Fuels 2.1% | |||||
Arch Coal, Inc., Co., | |||||
senior note, 9.875%, 6/15/19 | United States | 95,000 | 82,175 | ||
senior bond, 7.25%, 10/01/20 | United States | 36,000 | 27,450 | ||
senior note, 7.25%, 6/15/21 | United States | 58,000 | 44,225 | ||
c Atlas Energy Holdings Operating Co. LLC, senior note, 144A, 7.75%, | |||||
1/15/21 | United States | 350,000 | 332,500 | ||
Berry Petroleum Co., senior bond, 6.375%, 9/15/22 | United States | 27,000 | 27,675 | ||
d BP Capital Markets, senior note, FRN, 0.658%, 11/07/16 | United Kingdom | 80,000 | 80,221 | ||
EXCO Resources, Inc., senior note, 7.50%, 9/15/18 | United States | 400,000 | 392,000 | ||
c Halcon Resources Corp., senior note, 144A, 9.25%, 2/15/22 | United States | 350,000 | 360,500 | ||
Halcon Resources Corp., senior note, 9.75%, 7/15/20 | United States | 20,000 | 21,300 | ||
c Meg Energy Corp., 144A, 7.00%, 3/31/24 | Canada | 40,000 | 40,900 |
Semiannual Report | 35
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | |
Corporate Bonds, Notes and Senior Floating Rate | ||||
Interests (continued) | ||||
Oil, Gas & Consumable Fuels (continued) | ||||
c Pacific Rubiales Energy Corp., senior note, 144A, 5.375%, 1/26/19 | Colombia | 100,000 | $ | 100,250 |
d Peabody Energy Corp., Term Loan, FRN, 4.25%, 9/24/20 | United States | 20,000 | 20,098 | |
Petroleos De Venezuela SA, 5.50%, 4/12/37 | Venezuela | 57,000 | 30,495 | |
d Power Buyer LLC, first lien, senior secured, FRN, 4.25%, 5/06/20 | United States | 8,886 | 8,811 | |
d,e Powerteam Services, FRN, 5.50%, 5/06/20 | United States | 485 | 481 | |
c Quicksilver Resources, Inc., senior note, 144A, 11.00%, 7/01/21 | United States | 200,000 | 215,000 | |
d Shell International Finance, senior note, FRN, 0.451%, 11/15/16 | Netherlands | 80,000 | 80,059 | |
Talisman Energy, senior bond, 3.75%, 2/01/21 | Canada | 75,000 | 72,338 | |
1,936,478 | ||||
Packaging & Containers 0.0%† | ||||
Pact Group, 3.75%, 5/29/20 | United States | 20,000 | 19,888 | |
Pharmaceuticals 0.0%† | ||||
d Amneal Pharmaceuticals, first lien, guarnateed senior secured, 7.00%, | ||||
11/01/19 | United States | 20,000 | 20,200 | |
Real Estate 0.0%† | ||||
c Rialto Holdings LLC, senior bond, 144A, 7.00%, 12/01/18 | United States | 28,000 | 28,053 | |
Retailing 1.4% | ||||
BJ’s Wholesale Club, 4.50%, 9/26/19 | United States | 40,000 | 40,214 | |
c Mariposa, 144A, 8.75%, 10/15/21 | United States | 480,000 | 496,800 | |
Neiman Marcus, senior note, 5.00%, 10/17/20 | United States | 20,000 | 20,148 | |
New Albertsons, Inc., senior bond, 7.45%, 8/01/29 | United States | 400,000 | 333,000 | |
c Rue21, Inc., senior note, 144A, 9.00%, 10/15/21 | United States | 570,000 | 399,000 | |
1,289,162 | ||||
Road & Rail 0.1% | ||||
d Canadian National Railway, FRN, 0.438%, 11/06/15 | Canada | 80,000 | 80,100 | |
Semiconductors & Semiconductor Equipment 0.0%† | ||||
Amkor Technology, Inc., senior note, 6.375%, 10/01/22 | United States | 5,000 | 5,075 | |
Software 0.4% | ||||
Blackboard, Inc., B-3 Term Loan, 4.75%, 10/04/18 | United States | 14,239 | 14,404 | |
c Blackboard, Inc., senior note, 144A, 7.75%, 11/15/19 | United States | 40,000 | 39,800 | |
c First Data Corp., senior note, 144A, 10.625%, 6/15/21 | United States | 300,000 | 325,500 | |
Nuance Communications, senior bond, cvt., 2.75%, 11/01/31 | United States | 12,000 | 11,520 | |
d Trizetto Group Cov-lite, fist lien, senior secured, FRN, 4.75%, 5/02/18 | United States | 20,000 | 19,733 | |
410,957 | ||||
Transportation 0.6% | ||||
c Navios Maritime Acquisition Corp., senior bond, 144A, 8.125%, | ||||
11/15/21 | United States | 300,000 | 305,250 | |
c Topaz Marine SA, senior bond, 144A, 8.625%, 11/01/18 | United Arab Emirates | 250,000 | 252,500 | |
557,750 | ||||
Total Corporate Bonds, Notes, and Senior Floating Rate | ||||
Interests (Cost $16,480,349) | 16,675,442 |
36 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | |||
fCorporate Bonds and Notes in Reorganization 0.6% | ||||||
Electric Utilities 0.6% | ||||||
Edison Mission Energy, | ||||||
senior note, 7.75%, 6/15/16 | United States | 336,000 | $ | 252,840 | ||
senior note, 7.00%, 5/15/17 | United States | 142,000 | 107,210 | |||
senior note, 7.20%, 5/15/19 | United States | 267,000 | 201,585 | |||
561,635 | ||||||
Oil, Gas & Consumable Fuels 0.0%† | ||||||
c Ogx Austria GmbH, senior bond, 144A, 8.50%, 6/01/18 | United Kingdom | 200,000 | 18,000 | |||
Transportation 0.0%† | ||||||
Overseas Shipholding Group, Inc., senior note, 8.125%, 3/30/18 | United States | 12,000 | 12,150 | |||
Total Corporate Bonds and Notes in Reorganization | ||||||
(Cost $566,459) | 591,785 | |||||
Foreign Government and Agency Securities 0.6% | ||||||
d Hellenic Republic Government Bonds, senior notes, FRN, 2.00%, | ||||||
2/24/23 - 2/24/42 | Greece | 400,000 | EUR | 293,164 | ||
Mexican Bonos, unsecured note, 6.50%, 6/10/21 | Mexico | 3,000,000 | MXN | 239,551 | ||
Total Foreign Government and Agency Securities | ||||||
(Cost $544,173) | 532,715 | |||||
Asset-Backed Securities and Commercial Mortgage-Backed | ||||||
Securities 1.5% | ||||||
Automobiles & Components 0.1% | ||||||
HAROT 2013-4 A3, 0.69%, 9/18/17 | United States | 40,000 | 40,068 | |||
USAA Auto Owner Trust, 0.57%, 8/15/17 | United States | 20,000 | 20,022 | |||
60,090 | ||||||
Commercial Mortgage-Backed Securities 0.1% | ||||||
d Government National Mortgage Association, IO, FRN, 1.058%, 6/16/52 | . | United States | 244,398 | 17,834 | ||
c Hilton USA Trust 2013 HLF, 144A, 3.714%, 11/05/30 | United States | 100,000 | 100,500 | |||
118,334 | ||||||
Credit Cards 0.6% | ||||||
d American Express Credit Account Master 2012-1, FRN, 0.438%, | ||||||
1/15/20 | United States | 100,000 | 99,715 | |||
d American Express Credit Account Master 2013-3, FRN, 0.98%, | ||||||
5/15/19 | United States | 100,000 | 100,241 | |||
d Citibank Credit Card Issuance Trust 2013-A7, FRN, 0.599%, 9/10/20 | United States | 100,000 | 100,171 | |||
d Citibank Credit Card Issuance Trust 2013-A10, FRN, 0.73%, 2/07/18 | United States | 100,000 | 100,178 | |||
Chait 2013-A8, 1.01%, 10/15/18 | United States | 100,000 | 100,387 | |||
Comet 2013-A3, 0.96%, 9/16/19 | United States | 100,000 | 100,088 | |||
600,780 | ||||||
Other ABS 0.2% | ||||||
c SRFC 2013-3a A, 144A, 2.20%, 10/20/30 | United States | 100,000 | 100,632 | |||
c Tal 2013-2a A, 144A, 3.55%, 11/20/38 | United States | 100,000 | 99,980 | |||
200,612 |
Semiannual Report | 37
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed | ||||
Securities (continued) | ||||
Whole Loan Collateral CMO 0.5% | ||||
Alternative Loan Trust 2003-20cb, 5.75%, 10/25/33 | United States | 36,952 | $ | 38,601 |
Alternative Loan Trust 2003-9t1, 5.50%, 7/25/33 | United States | 39,995 | 40,295 | |
BAFC 2005-5 1a1, 5.50%, 9/25/35 | United States | 35,876 | 36,823 | |
d Bear Stearns Arm Trust 2004-9, FRN, 2.858%, 11/25/34 | United States | 27,458 | 26,827 | |
d CSFB 2003-27 4a4, FRN, 5.75%, 11/25/33 | United States | 5,429 | 5,673 | |
d CSFB 2003-ar26 7a1, FRN, 2.655%, 11/25/33 | United States | 14,593 | 13,920 | |
d CSFB 2003-ar28 4a1, FRN, 2.602%, 12/25/33 | United States | 10,605 | 10,141 | |
d CSFB 2004-ar4 3a1, FRN, 2.572%, 5/25/34 | United States | 35,218 | 33,791 | |
DBALT 2005-3 4a4, 5.25%, 6/25/35 | United States | 19,318 | 19,317 | |
c FDIC 2013-n1 A, 144A, 4.50%, 10/25/18 | United States | 19,528 | 19,780 | |
d JP Morgan Mortgage Trust 2006-a7, FRN, 2.563%, 1/25/37 | United States | 56,209 | 49,452 | |
d MARM 2006-2 3a1, FRN, 2.674%, 1/25/36 | United States | 24,481 | 23,348 | |
d Provident Funding Mortgage Loan Trust 2005-2, FRN, 2.653%, | ||||
10/25/35 | United States | 18,570 | 18,423 | |
d Volt 2013- Npl4 A1, FRN, 3.96%, 11/25/53 | United States | 100,000 | 99,992 | |
436,383 | ||||
Total Asset-Backed Securities and Commercial | ||||
Mortgage-Backed Securities (Cost $1,412,880) | 1,416,199 | |||
fMunicipal Bonds in Reorganization 0.6% | ||||
Alliance Airport, Texas, 5.25%, 12/01/29 | United States | 60,000 | 68,166 | |
Chicago O’ Hare Airport, Illinois, 5.50%, 12/01/30 | United States | 30,000 | 34,188 | |
NYC IDA American Airlines, New York, 6.90%, 8/01/24 | United States | 300,000 | 351,729 | |
Puerto Rico American Airlines, Puerto Rico, 6.30%, 6/01/23 | United States | 50,000 | 58,094 | |
Total Municipal Bonds in Reorganization (Cost $487,574) | 512,177 | |||
Number of Contracts | ||||
Options Purchased 0.3% | ||||
Calls – Exchange-Traded | ||||
Biotechnology 0.0%† | ||||
Merrimack Pharmaceuticals, Inc., December Strike Price $2.50, Expires | ||||
12/21/13 | United States | 45 | 6,638 | |
Diversified Financial Services 0.1% | ||||
Citigroup, Inc., June Strike Price $55.00, Expires 6/21/14 | United States | 75 | 22,200 | |
S&P 500 Index, January Strike Price $1,875.00, Expires 1/18/14 | United States | 84 | 45,360 | |
67,560 | ||||
Machinery 0.0%† | ||||
Timken Co., March Strike Price $55.00, Expires 3/22/14 | United States | 8 | 1,540 | |
Timken Co., March Strike Price $57.50, Expires 3/22/14 | United States | 8 | 980 | |
2,520 | ||||
Media 0.1% | ||||
DISH Network Corp., March Strike Price $55.00, Expires 3/22/14 | United States | 20 | 9,000 | |
Time Warner Cable, Inc., April Strike Price $120.00, Expires 4/19/14 | United States | 15 | 30,900 |
38 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Number of Contracts | Value | |
Options Purchased (continued) | ||||
Calls – Exchange-Traded (continued) | ||||
Media (continued) | ||||
Time Warner Cable, Inc., April Strike Price $125.00, Expires 4/19/14 | United States | 6 | $ | 10,200 |
Time Warner Cable, Inc., April Strike Price $140.00, Expires 4/19/14 | United States | 3 | 1,743 | |
51,843 | ||||
Software 0.1% | ||||
Microsoft Corp., January Strike Price $37.00, Expires 1/18/14 | United States | 94 | 18,330 | |
Microsoft Corp., April Strike Price $37.00, Expires 4/19/14 | United States | 37 | 10,138 | |
Vivendi SA, December Strike Price 15.00 EUR, Expires 12/20/13 | France | 16 | 8,284 | |
Vivendi SA, December Strike Price 17.00 EUR, Expires 12/20/13 | France | 11 | 2,647 | |
Vivendi SA, March Strike Price 20.00 EUR, Expires 3/21/14 | France | 78 | 4,980 | |
44,379 | ||||
Wireless Telecommunications Services 0.0%† | ||||
Vodafone Group PLC ADR, January Strike Price $32.00, Expires | ||||
1/18/14 | United Kingdom | 7 | 3,640 | |
Vodafone Group PLC ADR, April Strike Price $36.00, Expires 4/19/14 | United Kingdom | 102 | 28,662 | |
Vodafone Group PLC ADR, April Strike Price $37.00, Expires 4/19/14 | United Kingdom | 11 | 2,145 | |
34,447 | ||||
Puts – Exchange-Traded | ||||
Diversified Financial Services 0.0%† | ||||
S&P 500 Index, December Strike Price $1,700.00, Expires 12/21/13 | United States | 15 | 3,600 | |
S&P 500 Index, December Strike Price $1,600.00, Expires 12/31/13 | United States | 4 | 540 | |
S&P 500 Index, January Strike Price $1,675.00, Expires 1/18/14 | United States | 10 | 5,750 | |
S&P 500 Index, February Strike Price $1,700.00, Expires 2/22/14 | United States | 3 | 5,010 | |
Euro STOXX 50 Index, January Strike Price 2,900.00 EUR, | ||||
Expires 1/17/14 | France | 8 | 1,489 | |
S&P 500 Index, June Strike Price $1,650.00, Expires 6/21/14 | United States | 7 | 23,800 | |
40,189 | ||||
Diversified Telecommunication Services 0.0%† | ||||
Verizon Communications, Inc., April Strike Price $47.00, | ||||
Expires 4/19/14 | United States | 29 | 4,263 | |
Oil, Gas & Consumable Fuels 0.0%† | ||||
BPZ Resources, Inc., December Strike Price $2.00, Expires 12/21/13 | United States | 66 | 990 | |
Software 0.0%† | ||||
Vivendi SA, December Strike Price 16.00 EUR, Expires 12/20/13 | France | 58 | 81 | |
Vivendi SA, December Strike Price 17.42 EUR, Expires 12/20/13 | France | 20 | 84 | |
Vivendi SA, January Strike Price 16.00 EUR, Expires 1/17/14 | France | 66 | 448 | |
613 |
U.S. Government Securities 0.0%† | |
U.S. Treasury 10 Yr. Note, January Strike Price $122.00, |
Expires 1/24/14 | United States | 114 | 26,719 |
Total Options Purchased (Cost $253,935) | 280,161 |
Semiannual Report | 39
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | ||
Total Investments before Short Term Investments | |||||
(Cost $78,625,057) | $ | 81,542,384 | |||
Short Term Investments 0.0%† | |||||
U.S. Government and Agency Securities (Cost $49,985) 0.0%† | |||||
a,h U.S. Treasury Bills, 0.084%, 4/17/14 | United States | 50,000 | 49,985 | ||
Total Investments before Repurchase Agreements | |||||
(Cost $78,675,042) | 81,592,369 | ||||
Repurchase Agreement (Cost $2,585,375) 2.8% | |||||
g Joint Repurchase Agreement, 0.0717%, 12/02/13 | |||||
(Maturity Value $2,585,391) | United States | 2,585,375 | 2,585,375 | ||
BNP Paribas Securities Corp. (Maturity Value $313,556) | |||||
Credit Suisse Securities (USA) LLC (Maturity Value $376,278) | |||||
Deutsche Bank Securities, Inc. (Maturity Value $973,710) | |||||
HSBC Securities (USA), Inc. (Maturity Value $526,773) | |||||
Merrill Lynch, Pierce, Fenner & Smith, Inc. (Maturity Value $244,578) | |||||
Morgan Stanley and Co., Inc. (Maturity Value $150,496) | |||||
Collateralized by U.S. Government and Agency Securities, | |||||
0.004% - 0.37%, 2/28/14 - 2/26/16; U.S. Government and | |||||
Agency Securities, zero cpn, 6/1/17; U.S. Treasury Bills, 2/20/14; | |||||
U.S. Treasury Bonds, 7.25% - 10.625%, 8/15/15 - 11/15/18; | |||||
U.S. Treasury Notes, 0.125% - 4.875%, 11/30/13 - 8/15/23; | |||||
U.S. Treasury Notes, Index Linked, 0.5% - 2.375%, | |||||
1/15/14 - 7/15/18; U.S. Treasury Notes, zero cpn, | |||||
12/12/13 - 11/13/14 (valued at $2,637,099) | |||||
Total Investments (Cost $81,260,417) 90.8% | 84,177,744 | ||||
Options Written (0.0)%† | (45,417 | ) | |||
Securities Sold Short (22.2)% | (20,550,649 | ) | |||
Other Assets, less Liabilities 31.4% | 29,162,433 | ||||
Net Assets 100.0% | $ | 92,744,111 | |||
Number of Contracts | |||||
Options Written (0.0)%† | |||||
Calls – Exchange-Traded | |||||
Diversified Telecommunication Services (0.0)%† | |||||
Koninklijke KPN NV, December Strike Price 2.40 EUR, | |||||
Expires 12/20/13 | Netherlands | 41 | $ | (334 | ) |
Koninklijke KPN NV, December Strike Price 2.30 EUR, | |||||
Expires 12/20/13 | Netherlands | 210 | (3,423 | ) | |
Koninklijke KPN NV, January Strike Price 2.50 EUR, Expires 1/17/14 | Netherlands | 3 | (16 | ) | |
Verizon Communications, Inc., April Strike Price $50.00, | |||||
Expires 4/19/14 | United States | 17 | (3,111 | ) | |
(6,884 | ) | ||||
Media (0.0)%† | |||||
Time Warner Cable, Inc., January Strike Price $140.00, Expires 1/18/14 | United States | 3 | (1,440 | ) | |
Time Warner Cable, Inc., April Strike Price $135.00, Expires 4/19/14 | United States | 12 | (11,100 | ) | |
Time Warner Cable, Inc., April Strike Price $145.00, Expires 4/19/14 | United States | 9 | (3,105 | ) | |
(15,645 | ) | ||||
40 | Semiannual Report |
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Number of Contracts | Value | ||
Options Written (continued) | |||||
Calls – Exchange-Traded (continued) | |||||
Specialty Retail (0.0)%† | |||||
Jos A Bank Clothiers, Inc., April Strike Price $60.00, Expires 4/19/14 | United States | 8 | $ | (1,280 | ) |
Software (0.0)%† | |||||
Microsoft Corp., April Strike Price $42.00, Expires 4/19/14 | United States | 37 | (2,960 | ) | |
Vivendi SA, December Strike Price 19.35 EUR, Expires 12/20/13 | France | 42 | (588 | ) | |
Vivendi SA, December Strike Price 21.29 EUR, Expires 12/20/13 | France | 20 | (28 | ) | |
(3,576 | ) | ||||
Telecommunication Services (0.0)%† | |||||
Alcatel-Lucent, January Strike Price 3.10 EUR, Expires 1/17/14 | France | 46 | (1,444 | ) | |
Wireless Telecommunications Services (0.0)%† | |||||
Vodafone Group PLC, December Strike Price 240.00 GBp, | |||||
Expires 12/20/13 | United Kingdom t | 10 | (82 | ) | |
Puts – Exchange-Traded | |||||
Diversified Telecommunication Services (0.0)%† | |||||
S&P 500 Index, December Strike Price $1,650.00, Expires 12/21/13 | United States | 15 | (2,438 | ) | |
S&P 500 Index, December Strike Price $1,525.00, Expires 12/31/13 | United States | 16 | (1,480 | ) | |
(3,918 | ) | ||||
Machinery (0.0)%† | |||||
Timken Co., March Strike Price $47.50, Expires 3/22/14 | United States | 8 | (1,360 | ) | |
Timken Co., March Strike Price $50.00, Expires 3/22/14 | United States | 8 | (2,080 | ) | |
(3,440 | ) | ||||
Media (0.0)%† | |||||
DISH Network Corp., March Strike Price $41.00, Expires 3/22/14 | United States | 20 | (1,400 | ) | |
Time Warner Cable, Inc., April Strike Price $105.00, Expires 4/19/14 | United States | 6 | (345 | ) | |
Time Warner Cable, Inc., April Strike Price $110.00, Expires 4/19/14 | United States | 9 | (495 | ) | |
(2,240 | ) | ||||
Software (0.0)%† | |||||
Microsoft Corp., April Strike Price $33.00, Expires 4/19/14 | United States | 37 | (2,294 | ) | |
Vivendi SA, March Strike Price 17.00 EUR, Expires 3/21/14 | France | 78 | (4,344 | ) | |
(6,638 | ) | ||||
Total Options Written (Premiums Received $53,706) | (45,147 | ) | |||
Shares | |||||
iSecurities Sold Short (22.2)% | |||||
Common Stocks and Other Equity Interests (7.2)% | |||||
Agriculture (0.4)% | |||||
Universal Corp. | United States | 6,300 | (328,608 | ) | |
Airlines (0.7)% | |||||
Hawaiian Holdings, Inc. | United States | 35,500 | (323,760 | ) | |
Jetblue Airways Corp. | United States | 12,070 | (107,302 | ) | |
Norwegian Air Shuttle AS | Norway | 4,468 | (167,607 | ) | |
(598,669 | ) | ||||
Semiannual Report | 41 |
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares | Value | ||
iSecurities Sold Short (continued) | |||||
Common Stocks and Other Equity Interests (continued) | |||||
Automobiles (0.2)% | |||||
Great Wall Motor Co. Ltd., H | Hong Kong | 8,500 | $ | (51,915 | ) |
Tata Motors Ltd., ADR | India | 3,788 | (122,996 | ) | |
(174,911 | ) | ||||
Banks (0.1)% | |||||
Intesa Sanpaolo SpA | Italy | 35,179 | (85,067 | ) | |
Beverages (0.0)%† | |||||
Monster Beverage Corp. | United States | 617 | (36,514 | ) | |
Biotechnology (0.2)% | |||||
Merrimack Pharmaceuticals, Inc. | United States | 57,150 | (225,171 | ) | |
Capital Markets (0.1)% | |||||
Ares Capital Corp. | United States | 4,600 | (84,548 | ) | |
Commercial Services & Supplies (0.0)%† | |||||
Stewart Enterprises, Inc., A | United States | 2,724 | (36,093 | ) | |
Construction Materials (0.1)% | |||||
Vulcan Materials Co. | United States | 1,405 | (79,200 | ) | |
Electronic Equipment & Instruments (0.3)% | |||||
Vishay Intertechnology, Inc. | United States | 24,210 | (313,035 | ) | |
Energy (0.0)%† | |||||
NRG Energy, Inc. | United States | 1,459 | (38,605 | ) | |
Energy Equipment & Services (0.1)% | |||||
Core Laboratories NV | United States | 530 | (96,534 | ) | |
Engineering and Construction (0.1)% | |||||
Aeroports de Paris | France | 1,002 | (110,258 | ) | |
Entertainment (0.0)%† | |||||
Penn National Gaming, Inc. | United States | 2,600 | (37,544 | ) | |
Health Care Providers & Services (0.3)% | |||||
Molina Healthcare, Inc. | United States | 6,300 | (211,680 | ) | |
Community Health Systems, Inc. | United States | 889 | (36,671 | ) | |
(248,351 | ) | ||||
Hotels, Restaurants & Leisure (0.1)% | |||||
Accor SA | France | 1,170 | (51,323 | ) | |
Insurance (0.1)% | |||||
Fidelity National Financial, Inc. | United States | 3,375 | (98,111 | ) | |
Leisure Equipment & Products (0.1)% | |||||
Carnival Corp. | United States | 1,530 | (55,248 | ) | |
Life Science Tools & Services (0.0)%† | |||||
Albany Molecular Research, Inc. | United States | 2,800 | (33,824 | ) |
42 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares | Value | ||
iSecurities Sold Short (continued) | |||||
Common Stocks and Other Equity Interests (continued) | |||||
Machinery (0.0)%† | |||||
Stanley Black & Decker, Inc. | United States | 400 | $ | (32,556 | ) |
Media (0.3)% | |||||
Liberty Media Corp., A | United States | 1,700 | (260,882 | ) | |
Oil, Gas & Consumable Fuels (0.6)% | |||||
Linn Energy LLC | United States | 2,878 | (87,549 | ) | |
Concho Resources, Inc. | United States | 484 | (50,302 | ) | |
FMC Technologies, Inc. | United States | 1,219 | (58,634 | ) | |
BPZ Resources, Inc. | United States | 38,200 | (80,220 | ) | |
Sanchez Energy Corp. | United States | 10,550 | (270,818 | ) | |
(547,523 | ) | ||||
Pharmaceuticals (0.5)% | |||||
Omnicare, Inc. | United States | 7,700 | (441,056 | ) | |
Atrium Innovations, Inc. | Canada | 272 | (6,211 | ) | |
(447,267 | ) | ||||
Professional Services (0.6)% | |||||
CBIZ, Inc. | United States | 63,200 | (566,272 | ) | |
REITs (0.6)% | |||||
Duke Realty Corp. | United States | 1,241 | (18,838 | ) | |
Eastgroup Properties, Inc. | United States | 484 | (29,326 | ) | |
Equity Residential | United States | 1,585 | (81,691 | ) | |
Federal Realty Investment Trust | United States | 184 | (19,048 | ) | |
Host Hotels & Resorts, Inc. | United States | 2,800 | (51,548 | ) | |
Kilroy Realty Corp. | United States | 112 | (5,639 | ) | |
Kimco Realty Corp. | United States | 430 | (8,867 | ) | |
Piedmont Office Realty Trust, A | United States | 825 | (13,514 | ) | |
Public Storage | United States | 55 | (8,398 | ) | |
Regency Centers Corp. | United States | 230 | (10,773 | ) | |
UDR, Inc. | United States | 2,061 | (47,959 | ) | |
Weingarten Realty Investors | United States | 842 | (24,031 | ) | |
Health Care Reit, Inc. | United States | 3,900 | (218,361 | ) | |
(537,993 | ) | ||||
Retailing (0.4)% | |||||
Darden Restaurants, Inc. | United States | 2,010 | (107,193 | ) | |
Target Corp. | United States | 1,500 | (95,895 | ) | |
Wal-mart Stores, Inc. | United States | 1,370 | (110,984 | ) | |
Kohls Corp. | United States | 1,070 | (59,150 | ) | |
(373,222 | ) | ||||
Semiconductors & Semiconductor Equipment (0.3)% | |||||
Micron Technology, Inc. | United States | 8,800 | (185,680 | ) | |
Nvidia Corp. | United States | 2,370 | (36,972 | ) | |
Intel Corp. | United States | 2,528 | (60,268 | ) | |
(282,920 | ) |
Semiannual Report | 43
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Shares | Value | ||
iSecurities Sold Short (continued) | |||||
Common Stocks and Other Equity Interests (continued) | |||||
Software (0.2)% | |||||
Concur Technologies, Inc. | United States | 1,700 | $ | (165,053 | ) |
Telecommunication Services (0.2)% | |||||
Telecom Italia, SpA | Italy | 73,827 | (72,011 | ) | |
Verizon Communications, Inc. | United States | 2,196 | (108,965 | ) | |
(180,976 | ) | ||||
Textile, Apparel & Luxury Goods (0.4)% | |||||
Iconix Brand Group, Inc. | United States | 10,200 | (404,736 | ) | |
Transportation (0.2)% | |||||
C.H. Robinson Worldwide, Inc. | United States | 830 | (48,663 | ) | |
Golar LNG Ltd. | Norway | 3,340 | (121,342 | ) | |
(170,005 | ) | ||||
Total Common Stocks and Other Equity Interests | |||||
(Proceeds $6,597,448) | (6,701,019 | ) | |||
Exchange Traded Funds (11.6)% | |||||
iShares MSCI Brazil Capped ETF | United States | 2,371 | (111,318 | ) | |
iShares MSCI Canada ETF | United States | 14,239 | (414,212 | ) | |
iShares MSCI Emerging Markets ETF | United States | 2,300 | (97,405 | ) | |
iShares Nasdaq Biotechnology ETF | United States | 3,340 | (748,694 | ) | |
Market Vectors Oil Service ETF | United States | 1,500 | (72,585 | ) | |
Market Vectors Russia ETF | United States | 3,390 | (95,598 | ) | |
SPDR S&P 500 ETF Trust | United States | 41,000 | (7,421,000 | ) | |
SPDR S&P Retail ETF | United States | 1,282 | (113,406 | ) | |
SPDR S&P Oil & Gas Exploration & Production ETF | United States | 360 | (24,401 | ) | |
SPDR DJIA ETF Trust | United States | 3,819 | (613,790 | ) | |
Health Care Select Sector SPDR Fund | United States | 14,384 | (794,860 | ) | |
Industrial Select Sector SPDR Fund | United States | 1,198 | (60,379 | ) | |
Utilities Select Sector SPDR Fund | United States | 4,823 | (183,419 | ) | |
Total Exchange Traded Funds (Proceeds $10,314,590) | (10,751,067 | ) | |||
Principal Amount* | |||||
Corporate Bonds and Notes (3.3)% | |||||
Automobiles (0.1)% | |||||
c General Motors Co., senior bond, 144A, 4.875%, 10/02/23 | United States | 90,000 | (91,013 | ) | |
Beverages (0.2)% | |||||
Constellation Brands, Inc., senior note, 3.75%, 5/01/21 | United States | 150,000 | (141,750 | ) | |
Containers & Packaging (0.3)% | |||||
Ball Corp., senior bond, 4.00%, 11/15/23 | United States | 330,000 | (297,825 | ) |
44 | Semiannual Report
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | Country | Principal Amount* | Value | ||
iSecurities Sold Short (continued) | |||||
Corporate Bonds and Notes (continued) | |||||
Diversified Financial Services (0.5)% | |||||
c Denali Borrower Corp., first lien, senior secured note, 144A, 5.625%, | |||||
10/15/20 | United States | 300,000 | $ | (296,250 | ) |
c Nuveen Investments, Inc., senior note, 144A, 9.50%, 10/15/20 | United States | 150,000 | (148,125 | ) | |
(444,375 | ) | ||||
Household Products (0.5)% | |||||
c Sun Products Corp., senior note, 144A, 7.75%, 3/15/21 | United States | 570,000 | (493,050 | ) | |
Pipelines (1.0)% | |||||
Access Midstream Partner, senior bond, 4.875%, 5/15/23 | United States | 300,000 | (295,500 | ) | |
Markwest Energy Partners, senior bond, 4.50%, 7/15/23 | United States | 640,000 | (609,600 | ) | |
(905,100 | ) | ||||
Textiles, Apparel & Luxury Goods (0.2)% | |||||
c William Carter, senior note, 144A, 5.25%, 8/15/21 | United States | 150,000 | (153,375 | ) | |
Wireless Telecommunication Services (0.5)% | |||||
c Sprint Corp., senior bond, 144A, 7.875%, 9/15/23 | United States | 450,000 | (493,875 | ) | |
Total Corporate Bonds and Notes (Proceeds $3,041,747) | (3,020,363 | ) | |||
fCorporate Notes in Reorganization | |||||
(Proceeds $78,455) (0.1%) | |||||
Telecommunication Services (0.1%) | |||||
Nortel Networks Ltd., senior note, 10.75%, 7/15/16 | Canada | 68,000 | (78,200 | ) | |
Total Securities Sold Short (Proceeds $20,032,240) | $ | (20,550,649 | ) |
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aSecurity or a portion of the security has been pledged as collateral for securities sold short, open futures, and written option contracts. At November 30, 2013, the aggregate value
of these securities and cash pledged as collateral was $28,458,776, represents 30.69% of net assets.
bA portion or all of the security is held in connection with written option contracts at period end.
cSecurity 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
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,
2013, the aggregate value of these securities was $13,298,042 representing 14.34% of net assets.
dThe coupon rate shown represents the rate at period end.
eSee Note 8 regarding unfunded loan commitments.
fSee Note 7 regarding credit risk and defaulted securities.
gSee Note 1(c) regarding joint repurchase agreement.
hThe rate shown is the annualized seven-day yield at period end.
iSee Note 1(f) regarding securities sold short.
kNon-income producing.
lPerpetual security with no stated maturity date.
Semiannual Report | 45
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | ||||||||||||||
At November 30, 2013, the Fund had the following futures contracts outstanding. See Note 1(d). | ||||||||||||||
Futures Contracts | ||||||||||||||
Number of | Notional | Expiration | Unrealized | Unrealized | ||||||||||
Description | Type | Contracts | Value | Date | Appreciation Depreciation | |||||||||
Equity Contracts | ||||||||||||||
Euro STOXX 50 Index | Short | 2 | $ | 83,819 | 12/20/13 | $ | — | $ | (1,610 | ) | ||||
Nikkei 225 Index | Short | 1 | 153,673 | 12/12/13 | — | (12,027 | ) | |||||||
S&P 500 E-Mini Index | Short | 27 | 2,435,535 | 12/20/13 | — | (146,719 | ) | |||||||
Topix Index | Short | 1 | 123,261 | 12/12/13 | — | (5,415 | ) | |||||||
2,796,288 | — | (165,771 | ) | |||||||||||
Interest Rate Contracts | ||||||||||||||
U.S. Treasury 10 Yr. Note | Short | 4 | 501,500 | 3/20/14 | 55 | — | ||||||||
Total | $ | 3,297,788 | 55 | (165,771 | ) | |||||||||
Net unrealized appreciation (depreciation) | $ | (165,716 | ) | |||||||||||
At November 30, 2013, the Fund had the following forward exchange contracts outstanding. See Note 1(d). | ||||||||||||||
Forward Exchange Contracts | ||||||||||||||
Settlement | Unrealized | Unrealized | ||||||||||||
Currency | Counterparty Type | Quantity | Contract Amount* | Date | Appreciation | Depreciation | ||||||||
Euro | BNYM | Sell | 90,000 | 122,264 | 12/02/13 | $ | 1,853 | $ | — | |||||
Euro | BNYM | Sell | 100,000 | 135,849 | 12/02/13 | 105 | — | |||||||
Euro | BNYM | Sell | 534,000 | 725,435 | 12/02/13 | 4,084 | — | |||||||
Euro | BNYM | Sell | 160,000 | 217,359 | 12/02/13 | 2,572 | — | |||||||
Euro | BNYM | Sell | 35,000 | 47,547 | 12/02/13 | — | (191 | ) | ||||||
Euro | BNYM | Sell | 15,000 | 20,377 | 12/02/13 | — | (172 | ) | ||||||
Euro | BNYM | Sell | 25,000 | 33,962 | 12/02/13 | — | (561 | ) | ||||||
Euro | BNYM | Sell | 6,500 | 8,830 | 12/02/13 | — | (126 | ) | ||||||
Euro | BNYM | Sell | 25,000 | 33,962 | 12/02/13 | — | (262 | ) | ||||||
Euro | BNYM | Sell | 7,500 | 10,189 | 12/02/13 | — | (97 | ) | ||||||
Euro | BNYM | Sell | 1,500 | 2,038 | 12/02/13 | — | (7 | ) | ||||||
Philippine Peso | DBFX | Buy | 3,540,000 | 80,887 | 12/04/13 | — | (1,525 | ) | ||||||
Philippine Peso | DBFX | Sell | 3,540,000 | 80,887 | 12/04/13 | 868 | — | |||||||
Euro | CSFB | Sell | 30,000 | 25,186 | GBP | 12/09/13 | 467 | — | ||||||
Euro | CSFB | Sell | 30,000 | 24,996 | GBP | 12/09/13 | 156 | — | ||||||
Euro | CSFB | Sell | 120,000 | 163,019 | 12/13/13 | — | (2,619 | ) | ||||||
Japanese Yen | CSFB | Sell | 7,900,000 | 77,142 | 12/16/13 | 2,146 | — | |||||||
Thai Baht | BNYM | Sell | 2,780,781 | 86,536 | 12/16/13 | 65 | — | |||||||
British Pound | BNYM | Sell | 21,275 | 34,818 | 12/18/13 | — | (814 | ) | ||||||
British Pound | BNYM | Sell | 1,594 | 2,608 | 12/18/13 | — | (69 | ) | ||||||
British Pound | BNYM | Sell | 10,070 | 16,480 | 12/18/13 | — | (151 | ) | ||||||
British Pound | BNYM | Sell | 20,000 | 32,732 | 12/18/13 | — | (395 | ) | ||||||
Canadian Dollar | BNYM | Sell | 15,000 | 14,116 | 12/18/13 | 440 | — | |||||||
Canadian Dollar | BNYM | Sell | 25,000 | 23,527 | 12/18/13 | 713 | — | |||||||
Canadian Dollar | BNYM | Sell | 20,000 | 18,822 | 12/18/13 | 293 | — | |||||||
Danish Krone | BNYM | Sell | 1,500,000 | 273,239 | 12/18/13 | — | (1,733 | ) | ||||||
Danish Krone | BNYM | Sell | 125,000 | 22,770 | 12/18/13 | — | (75 | ) | ||||||
46 | Semiannual Report |
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | ||||||||||
Forward Exchange Contracts (Continued) | ||||||||||
Settlement | Unrealized | Unrealized | ||||||||
Currency | Counterparty Type | Quantity | Contract Amount* | Date | Appreciation | Depreciation | ||||
Euro | BNYM | Buy | 18,000 | 24,453 | 12/18/13 | $ | — | $ | (333 | ) |
Euro | BNYM | Sell | 25,899 | 35,184 | 12/18/13 | — | (45 | ) | ||
Euro | BNYM | Sell | 200,000 | 271,698 | 12/18/13 | — | (1,787 | ) | ||
Japanese Yen | BNYM | Buy | 2,500,000 | 24,412 | 12/18/13 | — | (1,285 | ) | ||
Japanese Yen | BNYM | Buy | 5,200,000 | 50,778 | 12/18/13 | — | (2,673 | ) | ||
Japanese Yen | BNYM | Buy | 1,340,000 | 13,085 | 12/18/13 | — | (492 | ) | ||
Japanese Yen | BNYM | Sell | 8,000,000 | 78,120 | 12/18/13 | 3,118 | — | |||
Japanese Yen | BNYM | Sell | 1,040,000 | 10,156 | 12/18/13 | 486 | — | |||
Japanese Yen | CSFB | Sell | 5,200,000 | 50,778 | 12/18/13 | 1,280 | — | |||
Japanese Yen | BNYM | Sell | 2,730,000 | 26,658 | 12/18/13 | 667 | — | |||
Japanese Yen | BNYM | Sell | 6,500,000 | 63,472 | 12/18/13 | 434 | — | |||
Swiss Franc | BNYM | Sell | 189,564 | 209,174 | 12/18/13 | — | (742 | ) | ||
Swiss Franc | BNYM | Sell | 1,037 | 1,144 | 12/18/13 | — | (3 | ) | ||
British Pound | MSCO | Sell | 8,984 | 14,556 | 12/20/13 | — | (333 | ) | ||
Euro | MSCO | Buy | 35,405 | 48,097 | 12/20/13 | 69 | — | |||
Euro | MSCO | Buy | 144,073 | 195,722 | 12/20/13 | — | (1,168 | ) | ||
Euro | MSCO | Buy | 61,044 | 82,928 | 12/20/13 | — | (961 | ) | ||
Euro | MSCO | Sell | 11,886 | 16,147 | 12/20/13 | 245 | — | |||
Euro | MSCO | Sell | 8,028 | 10,906 | 12/20/13 | 103 | — | |||
Euro | MSCO | Sell | 16,824 | 22,855 | 12/20/13 | 4 | — | |||
Euro | BNYM | Sell | 1,049,500 | 1,425,738 | 12/20/13 | 1,713 | — | |||
Euro | MSCO | Sell | 579,698 | 787,515 | 12/20/13 | — | (752 | ) | ||
Euro | MSCO | Sell | 8,908 | 12,101 | 12/20/13 | — | (200 | ) | ||
Euro | MSCO | Sell | 12,437 | 16,896 | 12/20/13 | — | (95 | ) | ||
Japanese Yen | MSCO | Buy | 1,287,600 | 12,574 | 12/20/13 | — | (672 | ) | ||
Japanese Yen | MSCO | Buy | 3,761,600 | 36,733 | 12/20/13 | — | (1,376 | ) | ||
Japanese Yen | MSCO | Buy | 13,110,480 | 128,026 | 12/20/13 | — | (4,859 | ) | ||
Japanese Yen | MSCO | Buy | 30,825,020 | 301,012 | 12/20/13 | — | (11,742 | ) | ||
Japanese Yen | MSCO | Sell | 55,205,300 | 539,090 | 12/20/13 | 20,841 | — | |||
Japanese Yen | MSCO | Sell | 9,832,600 | 96,017 | 12/20/13 | 4,448 | — | |||
Japanese Yen | MSCO | Sell | 9,394,100 | 91,735 | 12/20/13 | 3,980 | — | |||
Japanese Yen | MSCO | Sell | 4,095,240 | 39,991 | 12/20/13 | 1,666 | — | |||
Japanese Yen | MSCO | Sell | 3,094,112 | 30,215 | 12/20/13 | 927 | — | |||
Japanese Yen | MSCO | Sell | 6,109,840 | 59,664 | 12/20/13 | 1,473 | — | |||
Japanese Yen | MSCO | Sell | 5,293,240 | 51,689 | 12/20/13 | 1,106 | — | |||
Japanese Yen | BNYM | Sell | 2,100,000 | 20,507 | 12/20/13 | 131 | — | |||
Norwegian Krone | MSCO | Buy | 989,215 | 161,215 | 12/20/13 | — | (3,897 | ) | ||
Norwegian Krone | MSCO | Buy | 66,573 | 10,850 | 12/20/13 | — | (348 | ) | ||
Norwegian Krone | MSCO | Sell | 66,126 | 10,777 | 12/20/13 | 260 | — | |||
British Pound | UBSW | Buy | 175,000 | 74,351 | 12/30/13 | — | (1,449 | ) | ||
Euro | DBFX | Sell | 115,000 | 156,227 | 12/31/13 | — | (459 | ) | ||
Euro | CSFB | Sell | 80,000 | 108,686 | 2/03/14 | 1,445 | — | |||
Swiss Franc | CSFB | Sell | 10,900 | 12,033 | 2/06/14 | — | (53 | ) | ||
Unrealized appreciation (depreciation) | 58,158 | (44,521 | ) | |||||||
Net unrealized appreciation (depreciation) | $ | 13,637 | ||||||||
*In U.S. dollars unless otherwise indicated. |
Semiannual Report | 47
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
At November 30, 2013, the Fund had the following credit default swap contracts outstanding. See Note 1(d).
Credit Default Swap Contracts | |||||||||||||||||
Upfront | |||||||||||||||||
Counterparty/ Notional | Periodic | Expiration | Premiums | Unrealized | Unrealized | Market | |||||||||||
Description | Exchange | Amount | Payment Rate | Date | Paid (Received) Appreciation Depreciation | Value Ratingsa | |||||||||||
Centrally Cleared Swaps | |||||||||||||||||
Contracts to Buy Protection | |||||||||||||||||
Traded Index | |||||||||||||||||
CDX 21 HY 500 | ICE | 120,000 | 5.00 | % | 12/20/18 | $ | (8,869 | ) | $ | — | $ | (221 | ) | $ | (9,090 | ) | |
Centrally Cleared Swaps unrealized appreciation (depreciation) | — | (221 | ) | ||||||||||||||
OTC Swaps | |||||||||||||||||
Contracts to Buy Protection | |||||||||||||||||
Single Name | |||||||||||||||||
Bolivarian Republic | |||||||||||||||||
of Venezuela. | DBFX | 13,000 | 5.00 | % | 12/20/18 | 2,694 | 491 | — | 3,185 | ||||||||
Bolivarian Republic | |||||||||||||||||
of Venezuela. | DBFX | 16,000 | 5.00 | % | 12/20/18 | 2,770 | 1,149 | — | 3,919 | ||||||||
Windstream | |||||||||||||||||
Holdings, Inc | DBFX | 20,000 | 5.00 | % | 12/20/18 | (1,693 | ) | — | (521 | ) | (2,214 | ) | |||||
Contracts to Sell Protectionb | |||||||||||||||||
Single Name | |||||||||||||||||
Sprint | |||||||||||||||||
Communications, | |||||||||||||||||
Inc | DBFX | 20,000 | 5.00 | % | 12/20/18 | 1,740 | 581 | — | 2,321 | BB- | |||||||
OTC Swaps unrealized appreciation (depreciation) | 2,221 | (521 | ) | ||||||||||||||
Total Credit Default Swaps unrealized appreciation (depreciation) | 2,221 | (742 | ) | ||||||||||||||
Net unrealized appreciation (depreciation) | $ | 1,479 |
aBased on Standard and Poor’s (S&P) Rating for single name swaps and internal ratings for index swaps. Internal ratings based on mapping into equivalent ratings from external
vendors.
bThe Fund enters contracts to sell protection to create a long credit position. Performance triggers include default, bankruptcy or restructuring for single name swaps and failure to
pay or bankruptcy of the underlying securities for traded index swaps.
At November 30, 2013, the Fund had the following total return swap contracts outstanding. See Note 1(d).
Total Return Swap Contracts | ||||||||||||||
Expiration | Unrealized | Unrealized | ||||||||||||
Counterparty | Receive | Pay | Notional Valuea | Date | Appreciation | Depreciation | ||||||||
DBFX | 0.168% | San Miguel Corp. | 204,479 | 5/05/14 | $ | 2,764 | $ | — | ||||||
DBFX | China Unicom Hong Kong | |||||||||||||
Ltd. | 0.210% | 715,720 | HKD | 10/17/14 | — | (3,448 | ) | |||||||
DBFX | Hengan Group Co. Ltd. | 0.210% | 801,140 | HKD | 10/17/14 | — | (4,521 | ) | ||||||
DBFX | Pacific Basin Shipping | |||||||||||||
Ltd. | 0.210% | 1,845,920 | HKD | 10/17/14 | — | (11,580 | ) | |||||||
DBFX | Iberdrola SA | 0.093% | 195,025 | EUR | 10/18/14 | 1,506 | — | |||||||
DBFX | 0.168% | Billion Express | ||||||||||||
Investments, Ltd. | 417,759 | 10/18/14 | 5,667 | — | ||||||||||
48 | | | Semiannual Report |
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | ||||||||||||
Total Return Swap Contracts (continued) | ||||||||||||
Expiration | Unrealized | Unrealized | ||||||||||
Counterparty | Receive | Pay | Notional Valuea | Date | Appreciation Depreciation | |||||||
DBFX | 0.210% | Hengan International | ||||||||||
Group | 3,276,000 | HKD | 10/18/14 | $ | 14,490 | $ | — | |||||
DBFX | 0.168% | PB Issure Ltd. | 390,592 | 10/18/14 | 12,413 | — | ||||||
DBFX | 0.168% | Lotte Shoppng Co. Ltd. | 408,050 | 10/18/14 | 4,631 | — | ||||||
DBFX | Takashimaya Co. Ltd. | 0.109% | 31,282,500 | JPY | 10/21/14 | 8,479 | — | |||||
DBFX | 0.109% | Takashimaya Co. Ltd. | 43,337,700 | JPY | 10/21/14 | — | (8,538 | ) | ||||
DBFX | 0.093% | ACS Actividades | ||||||||||
Financial | 837,725 | EUR | 10/22/14 | — | (634 | ) | ||||||
DBFX | Kingsoft Corp. Ltd. | 0.210% | 2,376,360 | HKD | 10/31/14 | 6,390 | ||||||
DBFX | 0.168% | Algeta ASA | 847,101 | 11/01/14 | 103,559 | — | ||||||
DBFX | 0.210% | Kingsoft Corp. Ltd. | 3,932,035 | HKD | 11/01/14 | — | (14,649 | ) | ||||
DBFX | Algeta ASA | 0.168% | 561,663 | 11/05/14 | — | (67,405 | ) | |||||
DBFX | Himart Co. Ltd. | 0.168% | 163,863 | 11/06/14 | — | (4,657 | ) | |||||
DBFX | Nokia OYJ | 0.093% | 205,394 | EUR | 11/15/14 | — | (1,426 | ) | ||||
DBFX | 0.094% | Nokia OYJ | 241,666 | EUR | 11/15/14 | 4,345 | — | |||||
DBFX | IHH Healthcare | 0.161% | 121,331 | SGD | 11/18/14 | 2,206 | — | |||||
DBFX | Fosun International | 0.211% | 767,550 | HKD | 11/18/14 | 1,933 | — | |||||
DBFX | Semiconductor | |||||||||||
Manufacturing | ||||||||||||
International Corp. | 0.211% | 960,000 | HKD | 11/18/14 | — | (17,466 | ) | |||||
DBFX | 0.161% | Indah Capital Ltd. | 497,949 | SGD | 11/19/14 | — | (2,754 | ) | ||||
DBFX | 0.168% | Semiconductor | ||||||||||
Manufacturing | ||||||||||||
International Corp. | 408,343 | 11/19/14 | 18,474 | — | ||||||||
DBFX | 0.210% | Logo Star Ltd. | 19,375,000 | HKD | 11/22/14 | 3,047 | — | |||||
DBFX | Balfour Beatty PLC | 0.489% | 58,315 | GBP | 12/02/14 | — | (785 | ) | ||||
DBFX | 0.489% | Balfour Beatty Finance | 494,676 | GBP | 12/03/14 | 3,642 | — | |||||
MSCO | 0.488% | Rolls-Royce Holdings | ||||||||||
PLC | 125,081 | GBP | 10/15/15 | 19,285 | — | |||||||
MSCO | BHP Billiton Ltd. | 0.168% | 113,645 | 10/19/15 | — | (2,420 | ) | |||||
MSCO | STOXX Europe 600 Index | 0.123% | 531,144 | EUR | 10/19/15 | — | (32,987 | ) | ||||
MSCO | SPDR S&P Oil & Gas | |||||||||||
Exploration & Production | ||||||||||||
ETF | 0.168% | 154,378 | 10/19/15 | — | (352 | ) | ||||||
MSCO | Verizon Communications, | |||||||||||
Inc. | 0.168% | 124,444 | 10/19/15 | 1,134 | — | |||||||
MSCO | Caterpillar, Inc. | 0.168% | 109,918 | 10/19/15 | 441 | — | ||||||
MSCO | 0.123% | Christian Dior SA | 254,147 | EUR | 10/19/15 | — | (405 | ) | ||||
MSCO | Energy Select Sector | |||||||||||
SPDR Fund | 0.168% | 142,774 | 10/19/15 | — | (4,705 | ) | ||||||
MSCO | 0.419% | Inmarsat PLC | 23,200 | GBP | 10/19/15 | 634 | — | |||||
MSCO | 0.419% | Vodafone Group PLC | ||||||||||
ADR | 178,172 | GBP | 10/19/15 | 6,241 | — | |||||||
MSCO | 0.489% | Vodafone Group PLC | ||||||||||
ADR | 210,328 | GBP | 10/19/15 | 6,882 | — | |||||||
MSCO | 0.489% | Smiths Group PLC | 116,801 | GBP | 10/19/15 | — | (1,869 | ) | ||||
MSCO | 0.277% | Rhoen Klinikum AG | 158,873 | EUR | 10/19/15 | — | (632 | ) |
Semiannual Report | 49
Franklin Alternative Strategies Funds
Statement of Investments, November 30, 2013 (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | ||||||||||||
Total Return Swap Contracts (continued) | ||||||||||||
Expiration | Unrealized | Unrealized | ||||||||||
Counterparty | Receive | Pay | Notional Valuea | Date | Appreciation Depreciation | |||||||
MSCO | LVMH Moet Hennessy | |||||||||||
Vuitton SA | 0.123% | 253,872 | EUR | 10/19/15 | $ | 11,381 | $ | — | ||||
MSCO | 0.111% | Aozora Bank | 25,422,330 | JPY | 10/20/15 | 2,324 | — | |||||
MSCO | 0.111% | Nippon Telegraph | ||||||||||
Telephone Corp. | 12,268,703 | JPY | 10/20/15 | — | (4,383 | ) | ||||||
MSCO | 0.111% | NKSJ Holdings, Inc. | 24,924,900 | JPY | 10/20/15 | 33,785 | — | |||||
MSCO | 0.111% | Softbank Corp. | 20,602,101 | JPY | 10/20/15 | 15,041 | — | |||||
MSCO | 0.111% | Sony Corp. | 12,889,690 | JPY | 10/20/15 | — | (5,564 | ) | ||||
MSCO | 0.111% | Sony Financial | ||||||||||
Holdings Inc. | 983,779 | JPY | 10/20/15 | 259 | — | |||||||
MSCO | Cathay Pacific Airways Ltd. | 0.039% | 778,038 | HKD | 10/23/15 | — | (9,793 | ) | ||||
MSCO | 0.277% | Alcatel-Lucent | 83,326 | EUR | 10/28/15 | 10,829 | — | |||||
MSCO | 0.277% | Vivendi SA | 409,421 | EUR | 10/28/15 | — | — | |||||
MSCO | 0.419% | Imperial Tobacco | ||||||||||
Group PLC | 35,278 | GBP | 10/29/15 | — | (124 | ) | ||||||
MSCO | Royal Dutch Shell A PLC | 0.419% | 16,486 | GBP | 10/29/15 | — | (640 | ) | ||||
MSCO | Royal Dutch Shell B | 0.419% | 23,075 | GBP | 10/29/15 | — | (585 | ) | ||||
MSCO | Schneider SA | 0.419% | 14,909 | EUR | 10/29/15 | 375 | — | |||||
MSCO | 0.419% | Severn Trent PLC | 108,168 | GBP | 10/29/15 | — | (9,123 | ) | ||||
MSCO | 0.419% | Invensys PLC | 55,380 | GBP | 10/29/15 | — | (453 | ) | ||||
MSCO | 0.277% | OPAP SA | 51,398 | EUR | 10/29/15 | 4,565 | — | |||||
MSCO | 0.129% | Ryanair Holdings PLC | 37,059 | EUR | 11/05/15 | 189 | — | |||||
DBFX | 0.166% | Golar Lng Ltd. | 407,912 | 3/07/17 | — | (5,353 | ) | |||||
DBFX | 0.094% | Magyar Nemzeti | ||||||||||
Vagyonkexelo | 413,504 | EUR | 4/01/19 | 18,285 | — | |||||||
MSCO | 2.500% | Graincorp Ltd. | 5,170 | AUD | 12/30/49 | 231 | — | |||||
MSCO | International Business | |||||||||||
Machines Corp. | 0.168% | 237,684 | 1/17/49 | — | (26 | ) | ||||||
Unrealized appreciation (depreciation) | 325,427 | (217,277 | ) | |||||||||
Net unrealized appreciation (depreciation) | $ | 108,150 | ||||||||||
aIn U.S. dollars unless otherwise indicated. | ||||||||||||
See Abbreviations on page 74. |
50 | The accompanying notes are an integral part of these financial statements. | Semiannual Report
Franklin Alternative Strategies Funds
Financial Statements
Statement of Assets and Liabilities | |||
November 30, 2013 (unaudited) | |||
Franklin K2 | |||
Alternative | |||
Strategies Fund | |||
Assets: | |||
Investments in securities: | |||
Cost – Unaffiliated issuers | $ | 78,675,042 | |
Cost – Repurchase agreements | 2,585,375 | ||
Total cost of investments | $ | 81,260,417 | |
Value – Unaffiliated issuers | $ | 81,592,369 | |
Value – Repurchase agreements | 2,585,375 | ||
Total value of investments | 84,177,744 | ||
Cash | 12,665,923 | ||
Restricted Cash (Note 1e) | 9,658 | ||
Foreign currency, at value (cost $329,646) | 331,493 | ||
Receivables: | |||
Investment securities sold | 2,698,993 | ||
Affiliates | 79,405 | ||
Dividends and interest | 545,871 | ||
Due from brokers | 17,170,682 | ||
Deferred offering costs | 243,744 | ||
OTC Swaps (premiums paid $7,484) | 7,204 | ||
Unrealized appreciation on OTC swap contracts | 327,648 | ||
Unrealized appreciation on forward exchange contracts | 58,158 | ||
Unrealized appreciation on unfunded loan commitments (Note 8) | 2,588 | ||
Total assets | 118,319,111 | ||
Liabilities: | |||
Payables: | |||
Investment securities purchased | 3,970,949 | ||
Distribution fees | 8,689 | ||
Transfer agent fees | 910 | ||
Trustees’ fees and expenses | 20,368 | ||
Variation margin | 5,571 | ||
Offering costs | 282,431 | ||
Organization costs | 176,217 | ||
OTC Swaps (premiums received $2,302) | 1,693 | ||
Unrealized depreciation on OTC swap contracts | 217,798 | ||
Options written, at value (premiums received $53,706) | 45,147 | ||
Securities sold short, at value (proceeds $20,032,240) | 20,550,649 | ||
Due to brokers | 203,880 | ||
Unrealized depreciation on forward foreign currency contracts | 44,521 | ||
Accrued expenses and other liabilities | 46,177 | ||
Total liabilities | 25,575,000 | ||
Net assets, at value | $ | 92,744,111 |
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 51
Franklin Alternative Strategies Funds
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
November 30, 2013 (unaudited)
Franklin K2 | |||
Alternative | |||
Strategies Fund | |||
Net assets consist of: | |||
Paid-in capital | $ | 90,654,585 | |
Accumulated net investment loss | (57,237 | ) | |
Net unrealized appreciation (depreciation) | 2,367,040 | ||
Accumulated net realized gain (loss) | (220,277 | ) | |
Net assets, at value | $ | 92,744,111 | |
Class A: | |||
Net assets, at value | $ | 30,710,861 | |
Shares outstanding | 3,001,700 | ||
Net asset value per sharea | $ | 10.23 | |
Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 10.85 | |
Class C: | |||
Net assets, at value | $ | 10,253,693 | |
Shares outstanding | 1,002,451 | ||
Net asset value and maximum offering price per sharea | $ | 10.23 | |
Class R: | |||
Net assets, at value | $ | 10,230,436 | |
Shares outstanding | 1,000,000 | ||
Net asset value and maximum offering price per share | $ | 10.23 | |
Class R6: | |||
Net assets, at value | $ | 10,232,318 | |
Shares outstanding | 1,000,000 | ||
Net asset value and maximum offering price per share | $ | 10.23 | |
Advisor Class: | |||
Net assets, at value | $ | 31,316,803 | |
Shares outstanding | 3,060,603 | ||
Net asset value and maximum offering price per share | $ | 10.23 | |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable. |
52 | The accompanying notes are an integral part of these financial statements. | Semiannual Report
Franklin Alternative Strategies Funds
Financial Statements (continued)
Statement of Operations | ||||
for the period ended November 30, 2013a (unaudited) | ||||
Franklin K2 | ||||
Alternative | ||||
Strategies Fund | ||||
Investment income: | ||||
Dividends | $ | 82,199 | ||
Interest | 174,686 | |||
Total investment income | 256,885 | |||
Expenses: | ||||
Management fees (Note 3a) | 254,917 | |||
Transfer agent fees: (Note 3e) | ||||
Class A | 326 | |||
Class C | 109 | |||
Class R | 109 | |||
Class R6 | 36 | |||
Advisor Class | 331 | |||
Distribution fees: (Notes 3c) | ||||
Class A | 3,258 | |||
Class C | 3,621 | |||
Class R | 1,810 | |||
Custodian fees (Note 4) | 21,147 | |||
Reports to shareholders | 5,203 | |||
Registration and filing fees | 1,682 | |||
Professional fees | 13,637 | |||
Trustees’ fees and expenses | 20,368 | |||
Organization costs | 176,217 | |||
Offering costs | 38,689 | |||
Dividends and interest on securities sold short | 38,152 | |||
Other | 4,508 | |||
Total expenses | 584,120 | |||
Expenses waived/paid by affiliates (Note 3f) | (269,998 | ) | ||
Net expenses | 314,122 | |||
Net investment income (loss) | (57,237 | ) |
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 53
Franklin Alternative Strategies Funds
Financial Statements (continued)
Statement of Operations (continued) | ||||
for the period ended November 30, 2013a (unaudited) | ||||
Franklin K2 | ||||
Alternative | ||||
Strategies Fund | ||||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | $ | 120,768 | ||
Written options | (194 | ) | ||
Foreign currency transactions | 40,646 | |||
Futures contracts | (17,681 | ) | ||
Securities sold short | (326,095 | ) | ||
Swap contracts | (37,721 | ) | ||
Net realized gain (loss) | (220,277 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 2,410,065 | |||
Translation of other assets and liabilities denominated in foreign currencies | 13,062 | |||
Futures contracts | (165,716 | ) | ||
Swap contracts | 109,629 | |||
Net change in unrealized appreciation (depreciation) | 2,367,040 | |||
Net realized and unrealized gain (loss) | 2,146,763 | |||
Net increase (decrease) in net assets resulting from operations | $ | 2,089,526 | ||
aFor the period October 11, 2013 (commencement of operations) to November 30, 2013. |
54 | The accompanying notes are an integral part of these financial statements. | Semiannual Report
Franklin Alternative Strategies Funds
Financial Statements (continued)
Statement of Changes in Net Assets | |||
Franklin K2 Alternative | |||
Strategies Fund | |||
Period Ended | |||
November 30, 2013a | |||
(unaudited) | |||
Increase (decrease) in net assets: | |||
Operations: | |||
Net investment income (loss) | $ | (57,237 | ) |
Net realized gain (loss) from investments, written options, foreign currency transactions, futures contracts, | |||
securities sold short, and swap contracts | (220,277 | ) | |
Net change in unrealized appreciation (depreciation) on investments, translation of other assets and | |||
liabilities denominated in foreign currencies, future contracts, and swap contracts | 2,367,040 | ||
Net increase (decrease) in net assets resulting from operations | 2,089,526 | ||
Capital share transactions: (Note 2) | |||
Class A | 30,017,274 | ||
Class C | 10,025,000 | ||
Class R | 10,000,000 | ||
Class R6 | 10,000,000 | ||
Advisor Class | 30,612,311 | ||
Total capital share transactions | 90,654,585 | ||
Net increase (decrease) in net assets | 92,744,111 | ||
Net assets: | |||
End of period | $ | 92,744,111 | |
Accumulated net investment loss: | |||
End of period | $ | (57,237 | ) |
aFor the period October 11, 2013 (commencement of operations) to November 30, 2013. |
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 55
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited)
Franklin K2 Alternative Strategies Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Alternative Strategies Funds (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of three separate funds. The Franklin K2 Alternative Strategies Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund commenced operations on October 11, 2013, with five classes of shares: Class A, C, R, R6 and Advisor Class. Effective November 18, 2013, the Fund began publicly offering its shares. 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 and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s 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. Under procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities, exchange traded funds and derivative financial instruments (derivatives) 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. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the New York Stock Exchange (NYSE), whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
56 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
a. | Financial Instrument Valuation (continued) |
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s 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. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined. Repurchase agreements are valued at cost, which approximates market value.
Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair market value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC 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 VLOC 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 VLOC 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.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result,
Semiannual Report | 57
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
a. | Financial Instrument Valuation (continued) |
differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
58 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
c. | Joint Repurchase Agreement |
The Fund entered into a joint repurchase agreement whereby a portion of its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on November 29, 2013.
d. Derivative Financial Instruments
The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain
Semiannual Report | 59
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
d. | Derivative Financial Instruments (continued) |
various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund includes failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counter-party within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.
The Fund entered into exchange traded futures contracts primarily to manage and/or gain exposure to interest rate and equity price risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margin deposits of cash or securities are pledged by the Fund, and the daily change in fair value is accounted for as variation margin payable or receivable on the Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage and/or gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
60 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
d. | Derivative Financial Instruments (continued) |
The Fund entered into credit default swap contracts primarily to manage and/or gain exposure to credit risk. A credit default swap is an agreement between the Fund and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. These agreements may be privately negotiated in the OTC market (“OTC credit default swaps”) or may be executed in a multilateral trade facility platform, such as a registered exchange (“centrally cleared credit default swaps”). The underlying referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index, or a tranche of a credit index. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount. For centrally cleared credit default swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable on the Statement of Assets and Liabilities. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at which time they are realized. Payments received or paid to initiate a credit default swap contract are reflected on the Statement of Assets and Liabilities and represent compensating factors between stated terms of the credit default swap agreement and prevailing market conditions (credit spreads and other relevant factors). These upfront payments are amortized over the term of the contract as a realized gain or loss on the Statement of Operations.
The Fund entered into OTC total return swap contracts primarily to manage and/or gain exposure to equity price risk of an underlying asset. A total return swap is an agreement between the Fund and a counterparty to exchange a market linked return for a floating rate payment, both based upon a notional amount. Over the term of the contract, contractually required payments to be paid or received are accrued daily and recorded as unrealized depreciation or appreciation until the payments are made, at which time they are realized. Payments received or paid to recognize changes in the value of the underlying asset are recorded as realized gain or loss.
The Fund purchased and wrote exchange traded option contracts primarily to manage and/or gain exposure to equity price and interest rate risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. Options purchased are recorded as an asset while options written are recorded as a liability. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an
Semiannual Report | 61
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
d. | Derivative Financial Instruments (continued) |
option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium and the cost to close the position is recorded as a realized gain or loss.
See Notes 6 and 9 regarding investment transactions and other derivative information, respectively.
e. Restricted Cash
At November 30, 2013, the Fund received restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian/counterparty broker and is reflected in the Statement of Assets and Liabilities.
f. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current market value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends or interest due on securities sold short. Such dividends or interest and any security borrowing fees are recorded as an expense to the Fund.
g. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity.
Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.
62 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
h. | Income and Deferred Taxes |
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund 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 it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of November 30, 2013, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns).
i. 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. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Semiannual Report | 63
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
i. | Security Transactions, Investment Income, Expenses and Distributions (continued) |
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.
j. Organization and Offering Costs
Organization costs were expensed as incurred. Offering costs are amortized on a straight line basis over twelve months.
k. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
l. 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 Fund, 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, 2013, there were an unlimited number of shares authorized (without par value).
Transactions in the Fund’s shares were as follows:
Period Ended | |||
November 30, 2013a | |||
Shares | Amount | ||
Class A Shares: | |||
Shares sold | 3,001,700 | $ | 30,017,274 |
Class C Shares: | |||
Shares sold | 1,002,451 | $ | 10,025,000 |
64 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund | |||||
2. SHARES OF BENEFICIAL INTEREST (continued) | |||||
Period Ended | |||||
November 30, 2013a | |||||
Shares | Amount | ||||
Class R Shares: | |||||
Shares sold | 1,000,000 | $ | 10,000,000 | ||
Class R6 Shares: | |||||
Shares sold | 1,000,000 | $ | 10,000,000 | ||
Advisor Class Shares: | |||||
Shares sold | 3,062,014 | $ | 30,626,730 | ||
Shares redeemed | (1,411 | ) | (14,419 | ) | |
Net increase (decrease) | 3,060,603 | $ | 30,612,311 | ||
aFor the period October 11, 2013 (commencement of operations) to November 30, 2013. |
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 Trust are also officers, and/or directors of the following subsidiaries:
Subsidiary | Affiliation | |
K2/D&S Management Co., L.L.C. (K2 Advisors) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC, Inc. (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to K2 Advisors of 2.05% per year of the average daily net assets of the Fund.
Under each subadvisory agreement, the below entities, provide subadvisory services to the Fund. The subadvisory fee is paid by K2 Advisors based on the average daily net assets, and is not an additional expense of the Fund.
Sub-Advisor |
Basso Capital Management, L.P. |
Chatham Asset Management LLC |
Chilton Investment Company, LLC |
Impala Asset Management LLC |
Jennison Associates LLC |
Lazard Asset Management LLC |
Loomis Sayles & Company, L.P. |
P. Schoenfeld Asset Management LP |
York Registered Holdings, L.P. |
Semiannual Report | 65
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
3. | TRANSACTIONS WITH AFFILIATES (continued) |
b. | Administrative Fees |
Under an agreement with K2 Advisors, FT Services provides administrative services to the Fund. The fee is paid by K2 Advisors based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
Under a sub-administrative agreement between FT Services and BNY Mellon Investment Servicing (US) Inc. (BNY Mellon), BNY Mellon provides sub-administrative services to the Fund. The sub-administrative fee is paid by FT Services based on the average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class R6 and Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Distribution fees are not charged on shares held by affiliates. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.30 | % |
Class C | 1.00 | % |
Class R | 0.50 | % |
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. 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 have advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the period:
Sales charges retained net of commissions paid to | ||
unaffiliated broker/dealers | $ | 39 |
CDSC retained | $ | — |
66 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
3. | TRANSACTIONS WITH AFFILIATES (continued) |
e. | Transfer Agent Fees |
Each class of shares, except for Class R6, 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 shareholding servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the period ended November 30, 2013, the Fund paid transfer agent fees of $911.
f. Waiver and Expense Reimbursements
K2 Advisors has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Fund so that the expenses (excluding distribution fees, acquired fund fees and expenses, and expenses on securities sold short) for Class A, Class C, Class R and Advisor Class of the Fund does not exceed 2.15%, and Class R6 does not exceed 2.14% 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 at least October 4, 2014.
g. Other Affiliated Transactions
At November 30, 2013, Franklin Resources, Inc., owned 99.29% of the Fund’s outstanding shares.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its 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, 2013, there were no credits earned.
5. INCOME TAXES
At November 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 81,534,606 | |
Unrealized appreciation | $ | 3,303,577 | |
Unrealized (depreciation) | (660,439 | ) | |
Net unrealized appreciation (depreciation) | $ | 2,643,138 |
Semiannual Report | 67
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
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 wash sales, bond discount and premium, and offering costs.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments and securities sold short (excluding short term securities) for the period ended November 30, 2013, aggregated $104,790,104 and $46,097,147, respectively.
Transactions in options written during the period ended November 30, 2013, were as follows:
Number of | Premiums | ||||
Contracts | Received | ||||
Options written | 695 | $ | 59,524 | ||
Options expired | — | — | |||
Options exercised | — | — | |||
Options closed | (40 | ) | (5,818 | ) | |
Options outstanding at November 30, 2013 | 655 | $ | 53,706 |
See Notes 1(d) and 9 regarding derivative financial instruments and other derivative information, respectively.
7. CREDIT RISK AND DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and are about to be or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest.
At November 30, 2013, the aggregate net value of distressed company securities for which interest recognition has been discontinued was $1,025,762, representing 1.11% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.
8. UNFUNDED LOAN COMMITMENTS
The Fund enters into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrowers’ discretion. Funded portions of credit agreements are presented on the Statement of Investments.
68 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
8. UNFUNDED LOAN COMMITMENTS (continued)
At November 30, 2013, unfunded commitments were as follows:
Unfunded | ||
Borrower | Commitment | |
Akorn, Inc., Term Loan B, 3.50%, 10/31/20 | $ | 20,000 |
American Beacon Advisors, Inc., Initial Term Loan, 3.75%, 11/22/19 | 15,000 | |
Serta Simmons Holdings, LLC, Term Loan, 3.25%, 10/01/19 | 20,000 | |
Asurion, LLC, Incremental Tranche B-1 Term Loan, 3.25%, 05/24/19 | 20,000 | |
Boyd Gaming Corporation, Term B Loan, 3.00%, 8/14/20 | 10,000 | |
Brand Energy & Infrastructure Services, Inc., Initial Term Loan, 3.75%, | ||
11/26/20 | 20,000 | |
Calpine Corporation, Delayed Draw Term Loan, 3.00%, 10/30/20 | 20,000 | |
Crosby US Acquisition Corp., Initial Term Loan, 3.00%, 11/22/20 | 20,000 | |
CSC Holdings, LLC, Term B Loan, 2.50%, 04/17/20 | 20,000 | |
Del Monte, Inc., 0.85%, 1/26/21 | 10,000 | |
Drew Marine Partners, L.P., Term Loan, 3.50%, 11/19/20 | 990 | |
Energy Transfer Equity, L.P., Term Loan, 2.50%, 11/15/19 | 20,000 | |
Filtration Group Corporation, first lien Term Loan, 3.50%, 11/20/20 | 20,000 | |
Fleetpride, 11/27/19 | 6,971 | |
FMG Resources, Ltd., Term Loan, 3.25%, 6/30/19 | 20,000 | |
Garda World Security Corporation, Term B Delayed Draw Loan, 3.00%, | ||
11/06/20 | 4,074 | |
Gardner Denver, Inc., Initial Dollar Term Loan, 3.25%, 7/30/20 | 20,000 | |
Grosvenor Capital, 11/25/20 | 10,000 | |
Huntsman International, LLC, Incremental TLB, 3.00%, 10/15/20 | 40,000 | |
Husky Injection Molding Systems Ltd., New Term Loan, 3.25%, 7/02/18 | 6,000 | |
Microsemi Corporation, Term Loan, 2.75%, 2/19/20 | 20,000 | |
Murray Energy Corporation, Term Loan, 4.25%, 11/21/19 | 10,598 | |
Nexeo Solutions, LLC, Initial Loans, 3.50%, 9/08/17 | 14,720 | |
Nexeo Solutions, LLC, Term B-2 Loan, 3.50%, 9/09/17 | 5,400 | |
NXP, 0.85%, 1/22/20 | 10,000 | |
Phoenix Services, 6/30/17 | 16,986 | |
Power Buyer, LLC, first lien Term Loan, 3.25%, 5/06/20 | 629 | |
PRA Holdings, Inc., Initial Term Loan, 4.00%, 9/23/20 | 40,000 | |
Quintiles, 6/08/18 | 16,362 | |
Springer SBM, Initial Term B2 Loan, 4.00%, 8/14/20 | 20,000 | |
TNT Crane, 0.85%, 11/26/20 | 16,011 | |
Tribune Company, Term Loan B, 3.00%, 11/20/20 | 20,000 | |
Univar, Inc., Term B Loan, 3.50%, 6/30/17 | 20,000 | |
Virgin Media Investment Holdings Limited, B Facility, 2.75%, 6/08/20 | 40,000 | |
$ | 573,741 |
Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized appreciation or depreciation is included in the Statement of Assets and Liabilities and the Statement of Operations.
Semiannual Report | 69
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
9. OTHER DERIVATIVE INFORMATION
At November 30, 2013, the Fund’s investments in derivative contracts are reflected on the Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | |||||
Derivative Contracts | ||||||
Not Accounted for as | Statement of Assets and | Fair Value | Statement of Assets and | Fair Value | ||
Hedging Instruments | Liabilities Location | Amounta | Liabilities Location | Amounta | ||
Credit contracts | Unrealized appreciation on | Unrealized depreciation | ||||
swap contracts / Net assets | on swap contracts / Net | |||||
consist of – net unrealized | assets consist of – net | |||||
appreciation (depreciation) | $ | 2,221 | unrealized appreciation | |||
(depreciation) | $ | 742 | ||||
Equity contracts | Investments, at value / | Unrealized depreciation on | ||||
Unrealized appreciation on | swap contracts / Options | |||||
swap contracts / Net assets | written, at value / Net assets | |||||
consist of – net unrealized | consist of – net unrealized | |||||
appreciation (depreciation) | 578,869 | appreciation (depreciation) | 428,195 | |||
Foreign exchange contracts | Unrealized appreciation on | Unrealized depreciation on | ||||
forward exchange contracts | 58,158 | forward exchange contracts | 44,521 | |||
Interest rate contracts | Investments, at value / Net | |||||
assets consist of – net | ||||||
unrealized appreciation | ||||||
(depreciation) | 26,774 |
aIncludes cumulative appreciation (depreciation) of futures contracts / and centrally cleared swaps as reported in the Statement of Investments. Only current day’s variation margin is separately reported within the Statement of Assets and Liabilities.
For the period ended November 30, 2013, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
Change in | |||||||
Unrealized | |||||||
Realized | Appreciation | ||||||
Derivative Contracts | Gain (Loss) | (Depreciation) | |||||
Not Accounted for as | Statement of | for the | for the | ||||
Hedging Instruments | Operations Locations | Period | Period | ||||
Credit contracts | Net change in unrealized appreciation (depreciation) on | ||||||
swap contracts | $ | — | $ | 1,479 | |||
Equity contracts | Net realized gain (loss) from investments, written options, | ||||||
futures and swap contracts / Net change in unrealized | |||||||
appreciation (depreciation) on investments, futures and | |||||||
swap contracts | (74,059 | ) | (17,480 | ) | |||
Foreign exchange contracts | Net realized gain (loss) from foreign currency transactions / | ||||||
Net change in unrealized appreciation (depreciation) on | |||||||
translation of other assets and liabilities denominated in | |||||||
foreign currencies | 7,336 | 13,637 | |||||
Interest rate contracts | Net realized gain (loss) from futures contracts / Net change | ||||||
in unrealized appreciation (depreciation) on investments | |||||||
and futures contracts | 2,079 | (5,301 | ) |
70 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
9. OTHER DERIVATIVE INFORMATION (continued)
For the period ended November 30, 2013, the average month end market value of derivatives represented 0.96% of average month end net assets. The average month end number of open derivative contracts for the period was 162.
At November 30, 2013, the Fund’s OTC derivative assets and liabilities, are as follows:
Gross and Net Amounts of Assets and Liabilities Presented | ||||
in the Statement of Assets and Liabilities | ||||
Assetsa | Liabilitiesa | |||
Derivatives | ||||
Forward Exchange Contracts | $ | 58,158 | $ | 44,521 |
Swap Contracts | 327,648 | 217,798 | ||
Total | $ | 385,806 | $ | 262,319 |
aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
At November 30, 2013, the Fund’s OTC derivative assets which may be offset against the Fund’s OTC derivative liabilities, and collateral received from the counterparty, is as follows:
Amounts Not Offset in the | |||||||||||||
Statement of Assets and Liabilities | |||||||||||||
Gross and | |||||||||||||
Net Amounts of | |||||||||||||
Assets Presented | Financial | Financial | |||||||||||
in the Statement | Instruments | Instruments | Cash | Net Amount | |||||||||
of Assets and | Available for | Collateral | Collateral | (Not less | |||||||||
Liabilities | Offset | Received | Received | than zero) | |||||||||
Counterparty | |||||||||||||
BNYM | $ | 16,674 | $ | (12,013 | ) | $ | — | $ | — | $ | 4,661 | ||
CSFB | 5,494 | (2,672 | ) | — | — | 2,822 | |||||||
DBFX | 214,920 | (145,721 | ) | — | — | 69,199 | |||||||
MSCO | 148,718 | (100,464 | ) | — | (9,658 | ) | 38,596 | ||||||
UBSW | — | — | — | — | — | ||||||||
Total | $ | 385,806 | $ | (260,870 | ) | $ | — | $ | (9,658 | ) | $ | 115,278 |
Semiannual Report | 71
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
9. OTHER DERIVATIVE INFORMATION (continued)
At November 30, 2013, the Fund’s OTC derivative liabilities which may be offset against the Fund's OTC derivative assets, and collateral pledged to the counterparty, is as follows:
Amounts Not Offset in the | |||||||||||
Statement of Assets and Liabilities | |||||||||||
Gross and | |||||||||||
Net Amounts of | |||||||||||
Liabilities Presented | Financial | Financial | |||||||||
in the Statement | Instruments | Instruments | Cash | Net Amount | |||||||
of Assets and | Available for | Collateral | Collateral | (Not less | |||||||
Liabilities | Offset | Pledged | Pledged | than zero) | |||||||
Counterparty | |||||||||||
BNYM | $ | 12,013 | $ | (12,013 | ) | $ | — | $ | — | $ | — |
CSFB | 2,672 | (2,672 | ) | — | — | — | |||||
DBFX | 145,721 | (145,721 | ) | — | — | — | |||||
MSCO | 100,464 | (100,464 | ) | — | — | — | |||||
UBSW | 1,449 | — | — | — | 1,449 | ||||||
Total | $ | 262,319 | $ | (260,870 | ) | $ | — | $ | — | $ | 1,449 |
See Notes 1(d) and 6 regarding derivative financial instruments and investment transactions, respectively.
10. FAIR VALUE MEASUREMENTS
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s 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 Fund’s 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 Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
72 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
10. FAIR VALUE MEASUREMENTS (continued)
A summary of inputs used as of November 30, 2013, in valuing the Fund’s assets and liabilities
carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||
Assets: | ||||||||
Investments in Securities: | ||||||||
Common Stocks and Other Equity | ||||||||
Interests a,b | $ | 45,881,955 | $ | — | $ | — | $ | 45,881,955 |
Preferred Stocks | 1,501,253 | 1,002,264 | — | 2,503,517 | ||||
Asset-Backed Securities and Commercial | ||||||||
Mortgage-Backed Securities | — | 1,416,199 | — | 1,416,199 | ||||
Corporate Bonds, Notes, and Senior | ||||||||
Floating Rate Interests | — | 16,675,442 | — | 16,675,442 | ||||
Foreign Government & Agency | ||||||||
Securities | — | 532,715 | — | 532,715 | ||||
Convertible Bonds | — | 13,148,433 | — | 13,148,433 | ||||
Municipal Bonds in Reorganization | — | 512,177 | — | 512,177 | ||||
Purchased Options | 280,161 | — | — | 280,161 | ||||
Short Term Investments | 49,985 | 2,585,375 | — | 2,635,360 | ||||
Corporate Bonds and Notes in Reorganization | — | 591,785 | — | 591,785 | ||||
Total Investments in Securities | $ | 47,713,354 | $ | 36,464,390 | $ | — | $ | 84,177,744 |
Futures Contracts | $ | 55 | $ | — | $ | — | $ | 55 |
Forward Exchange Contracts | — | 58,158 | — | 58,158 | ||||
Swap Contracts | — | 327,648 | — | 327,648 | ||||
Liabilities: | ||||||||
Options Written | 45,147 | — | — | 45,147 | ||||
Securities Sold Short | 17,452,086 | 3,098,563 | — | 20,550,649 | ||||
Futures Contracts | 165,771 | — | — | 165,771 | ||||
Forward Exchange Contracts | — | 44,521 | — | 44,521 | ||||
Swap Contracts | — | 218,019 | — | 218,019 |
aIncludes common stocks as well as other equity investments.
bFor detailed categories, see the accompanying Statement of Investments.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented
when there are significant Level 3 investments at the end of the period.
Semiannual Report | 73
Franklin Alternative Strategies Funds
Notes to Financial Statements (unaudited) (continued)
Franklin K2 Alternative Strategies Fund
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
12. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.
ABBREVIATIONS | |||||
Counterparty | Currency | Selected Portfolio | |||
BNYM | - The Bank of New York | CLP | - Chilean Peso | ABS | - Asset Backed Securities |
Mellon | EUR | - Euro | ADR | - American Depositary Receipt | |
CSFB | - Credit Suisse First Boston | GBP | - British Pound | FRN | - Floating Rate Note |
DBFX | - Deutsche Bank AG | HKD | - Hong Kong Dollar | IO | - Interest Only |
MSCO | - Morgan Stanley and Co., | JPY | - Japanese Yen | ||
Inc. | MXN | - Mexican Peso | |||
UBSW | - UBS AG | SGD | - Singapore Dollar |
74 | Semiannual Report
Franklin Alternative Strategies Funds
Shareholder Information
Franklin K2 Alternative Strategies Fund
Board Review of Investment Management Agreement and Sub-Advisory Agreements
The Board of Trustees (Board), including the independent trustees, at a Board meeting held on September 13, 2013, unanimously approved the Investment Management Agreement between the Franklin Alternatives Strategies Funds (Trust), on behalf of the Franklin K2 Alternative Strategies Fund (Fund), and K2/D&S Management Co., L.L.C. (K2 Advisors), and each Sub-Advisory Agreement between K2 Advisors and each of Basso Capital Management, L.P. (Basso), Chatham Asset Management, LLC (Chatham), Chilton Investment Company, LLC (Chilton), Independence Capital Asset Partners, LLC (ICAP), Impala Asset Management LLC (Impala), Jennison Associates LLC (Jennison), Lazard Asset Management LLC (Lazard), Loomis Sayles & Company, L.P. (Loomis), P. Schoenfeld Asset Management LP (PSAM), Wellington Management Company, LLP (Wellington) and York Registered Holdings, L.P. (together with Basso, Chatham, Chilton, ICAP, Impala, Jennison, Lazard, Loomis, PSAM and Wellington, the Sub-Advisors). The Board also approved the Subcontract for Fund Administrative Services between K2 Advisors and Franklin Templeton Services, LLC (FT Services) with respect to the Fund and the Subcontract for Fund Administrative and Accounting Services between FT Services and The Bank of New York Mellon with respect to the Fund.
Prior to a meeting of all of the trustees for the purpose of considering such approvals, the trustees participated in two other meetings held in connection with the approval process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of the investment manager (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the investment management agreement and the sub-advisory agreements for the Fund, the Board, including the independent trustees, determined that the investment management agreement and the sub-advisory agreements, including the investment management and sub-advisory fee structure provided for in the agreements, were fair and reasonable.
In making the foregoing approvals, the Board considered various materials related to the investment management agreement and the sub-advisory agreements including: (1) a copy of the proposed form of investment management agreement and sub-advisory agreements; (2) information describing the nature, quality and extent of services that K2 Advisors and each Sub-Advisor would provide to the Fund, and the proposed investment management fees and sub-advisory fees payable to K2 Advisors and each Sub-Advisor; (3) reports from K2 Advisors on the diligence conducted on each Sub-Advisor and the reasons for recommending each Sub-Advisor as a sub-advisor for the Fund, including, but not limited to, each Sub-Advisor’s background, experience, personnel, operations, policies, procedures and compliance functions and plans for the integration of such operations, policies, procedures and compliance functions with those of K2 Advisors; and (4) a report from the Fund’s Chief Compliance Officer regarding K2 Advisors’
Semiannual Report | 75
Franklin Alternative Strategies Funds
Shareholder Information (continued)
Franklin K2 Alternative Strategies Fund
Board Review of Investment Management Agreement and Sub-Advisory Agreements
(continued)
and each Sub-Advisor’s compliance program and capabilities, including policies and procedures in place to address potential conflicts of interest, and the diligence undertaken by the Fund’s Chief Compliance Officer with respect thereto.
The Board’s consideration of whether to approve the investment management agreement and each sub-advisory agreement took into account several factors including, but not limited to, the following: (1) the nature and quality of the services to be provided by K2 Advisors and each Sub-Advisor to the Fund under the proposed investment management agreement and sub-advisory agreements, respectively; (2) K2 Advisors’ and each Sub-Advisor’s experience as a manager of other funds and accounts; (3) K2 Advisors’ and each Sub-Advisor’s strength and reputation within the industry; (4) the fairness of the compensation under the proposed investment management agreement and sub-advisory agreements; (5) the pricing structure (including fee waivers and the estimated expense ratio to be borne by shareholders) of the Fund; (6) the personnel, operations, financial condition, and investment management capabilities, methodologies and resources of K2 Advisors and each Sub-Advisor, including each management team’s expertise in the management of other alternative strategy funds; (7) profitability matters; (8) reports from K2 Advisors on the diligence conducted on each Sub-Advisor and the reasons for recommending each Sub-Advisor, as a sub-advisor for the Fund, including, but not limited to, each Sub-Advisor’s background, experience, personnel, operations, policies, procedures and compliance functions and plans for the integration of such operations, policies, procedures and compliance functions with those of K2 Advisors; and (9) a report from the Trust’s Chief Compliance Officer regarding K2 Advisors’ and each Sub-Advisor’s compliance program and capabilities, including policies and procedures in place to address potential conflicts of interest, and the diligence undertaken by the Trust’s Chief Compliance Officer with respect thereto. Particular attention was given to (1) the diligent risk management program of K2 Advisors, including those aspects of the program related to selecting and overseeing sub-advisors to the Fund, (2) each Sub-Advisor’s risk management program, and (3) derivatives and other complex instruments that are expected to be held by the Fund and how such instruments are expected to be used to carry out the Fund’s investment goals.
The Board was also provided with data from Lipper, Inc., an independent third party (Lipper), comparing the Fund’s proposed fees with the fees of other funds in the Fund’s Lipper selected peer group (Lipper Data) and data from management on other funds in the Franklin “Key Competitor” Peer Group for Class A or Institutional Class shares (Key Competitor Peer Group), which included newly established funds similarly structured to the Fund that had not been included in the Lipper selected peer group and that management believed are comparable to the Fund. The Board reviewed this information and its usefulness in the approval process with respect to matters such as comparative fees and expense ratios. The Board considered Lipper’s acknowledgement that the Lipper Data contains only a few funds for comparison and that it expects additional comparable funds in the upcoming year. In this regard, the Board noted that
76 | Semiannual Report
Franklin Alternative Strategies Funds
Shareholder Information (continued)
Franklin K2 Alternative Strategies Fund
Board Review of Investment Management Agreement and Sub-Advisory Agreements
(continued)
a number of the comparable funds in the Key Competitor Peer Group were not included in the Lipper Data because they had only recently commenced operations but were likely to have been included in the Lipper Data if they had been in operation for a longer period of time. The Board concluded that, taken together, the Lipper Data and the Key Competitor Peer Group were helpful in the performance of its duties.
The following sets forth some of the primary information and factors relevant to the Board’s decisions. This discussion of the information and factors considered by the Board (including the information and factors discussed above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.
NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services to be provided by K2 Advisors and each Sub-Advisor. In this regard, they reviewed the Fund’s proposed investment goal and K2 Advisors’ and each Sub-Advisor’s proposed investment strategy and sub-strategy, and K2 Advisors’ and each Sub-Advisor’s ability to implement such investment strategy and/or sub-strategy, including, but not limited to, K2 Advisors’ and each Sub-Advisor’s trading practices and investment decision processes.
The Board noted the responsibilities that K2 Advisors would have as the Fund’s investment manager, including (1) due diligence of the Sub-Advisors, their respective trading strategies, risk management, operations and businesses, (2) oversight and monitoring of the day-to-day investment activities of the Sub-Advisors and the ongoing assessment of their performance, (3) portfolio construction with respect to the allocation of assets among Sub-Advisors, investment funds, cash and other investments, (4) risk management, (5) on-going oversight and monitoring of the Sub-Advisors’ compliance with the investment mandate, compliance policies and procedures and federal securities laws, (6) preparing quarterly reports to the Board, and (7) the implementation of Board directives as they relate to the Fund. The Trustees considered the successful performance of K2 Advisors in managing other investment products with similar investment strategies to the investment strategies of the Fund that are not subject to the Investment Company Act of 1940, as amended (1940 Act).
With respect to the sub-advisory services to be provided by each Sub-Advisor, the Board noted the responsibilities that each Sub-Advisor would have with respect to the portion of the Fund’s assets allocated to the Sub-Advisor by K2 Advisors (Sub-Advised Portion), including, among others, implementing the investment strategies with respect to the Sub-Advised Portion and ensuring compliance with the investment strategies, policies and limitations of the Sub-Advised
Semiannual Report | 77
Franklin Alternative Strategies Funds
Shareholder Information (continued)
Franklin K2 Alternative Strategies Fund
Board Review of Investment Management Agreement and Sub-Advisory Agreements
(continued)
Portion. The trustees considered the successful performance of each Sub-Advisor in managing other investment products with similar investment strategies to the investment strategies of its Sub-Advised Portion of the Fund, including, with respect to certain Sub-Advisors, mutual funds with similar investment strategies.
The trustees reviewed the Fund’s portfolio management team at K2 Advisors and each Sub-Advisor, including each such team’s performance, staffing, skills and compensation program. The trustees considered various other products, portfolios and entities that are advised by K2 Advisors and each Sub-Advisor and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts. The Board also considered a report from the Trust’s Chief Compliance Officer regarding K2 Advisors’ and each Sub-Advisor’s compliance programs as such policies relate to the operations of the Fund. The Board considered the selection and due diligence process employed by K2 Advisors in proposing each Sub-Advisor as a sub-advisor to the Fund, including the due diligence undertaken with respect to the Sub-Advisor’s compliance capabilities, and efforts to integrate each Sub-Advisor’s operations, policies, procedures and compliance functions with those of K2 Advisors. The trustees considered K2 Advisors’ significant efforts in developing and implementing compliance procedures established in accordance with Securities and Exchange Commission and other requirements. They also considered the nature, extent and quality of the services to be provided under the other service agreements with affiliates of K2 Advisors.
Based on their review, the trustees were satisfied with the nature and quality of the overall services to be provided by K2 Advisors and its affiliates and each Sub-Advisor to the Fund and its shareholders and were confident in the abilities of K2 Advisors and each Sub-Advisor to implement their respective proposed investment strategy and/or sub-strategy and to provide quality services to the Fund and its shareholders.
INVESTMENT PERFORMANCE. The Board noted that, as the Fund had not yet commenced investment operations, there was no investment performance for the Fund. As noted earlier, the Board did consider the investment performance of K2 Advisors in managing other non-1940 Act investment products with similar investment goals to the investment goals of the Fund, as well as the investment performance of each Sub-Advisor in managing other investment products with similar investment strategies to the investment strategies of its Sub-Advised Portion of the Fund, including, with respect to certain Sub-Advisors, mutual funds with similar investment strategies. The Board also considered the proposed performance benchmarks for the Fund and how such benchmarks were selected by K2 Advisors and would be utilized to measure performance of K2 Advisors and each Sub-Advisor.
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Franklin Alternative Strategies Funds
Shareholder Information (continued)
Franklin K2 Alternative Strategies Fund
Board Review of Investment Management Agreement and Sub-Advisory Agreements
(continued)
COMPARATIVE EXPENSES AND PROFITABILITY. The Board considered the cost of the services to be provided and the profits to be realized by K2 Advisors (and its affiliates) and each Sub-Advisor from their respective relationships with the Fund. The Board noted that K2 Advisors, its affiliates and each Sub-Advisor could not report any financial results from their relationships with the Fund because the Fund had not yet commenced investment operations, and thus, the Board could not evaluate K2 Advisors’, its affiliates’ or each Sub-Advisor’s profitability with respect to the Fund. The Board considered that the Fund is expected to incur considerable expenses in its first year of operation, which will largely be absorbed by K2 Advisors through expense waivers, and is not anticipated to generate significant, if any, profit for K2 Advisors and/or its affiliates for some time.
In considering the appropriateness of the investment management fee charged to the Fund, the Board also reviewed and considered the investment management fees in light of the nature, extent and quality of the investment management services expected to be provided by K2 Advisors and each Sub-Advisor, as more fully discussed above. The Board noted that the sub-advisory fees would be paid by K2 Advisors to each Sub-Advisor and would not be additional fees to be borne by the Fund. The Board also noted that the sub-advisory fees to be paid by K2 Advisors to each Sub-Advisor were the product of arms-length negotiations between K2 Advisors and each Sub-Advisor and the Board considered the allocation of the investment management fee charged to the Fund between K2 Advisors and each Sub-Advisor in light of the nature, extent and quality of the investment management services expected to be provided by K2 Advisors and each Sub-Advisor. The trustees considered various other products, portfolios and entities that are advised by K2 Advisors and each Sub-Advisor and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts. The Board considered the extent to which K2 Advisors and each Sub-Advisor may derive ancillary benefits from Fund operations.
Consideration was also given to the information provided by Lipper on other alternative strategies funds in the Lipper Data and the information provided by management on other alternative strategies funds in the Key Competitor Peer Group (collectively with the funds in the Lipper Data, the Comparable Funds). The Board noted that the expected investment management fee (including the proposed fee waiver and expense limitation arrangements) of the Fund was within the range of fees charged by the Comparable Funds (including their proposed fee waiver and expense limitation arrangements). The expected investment management fee of the Fund (excluding the proposed fee waiver and expense limitation arrangements) was slightly above the range of investment management fees charged by the Comparable Funds (excluding their proposed fee waiver and expense limitation arrangements). The Board also noted that the expected total expenses (both including and excluding the proposed fee waiver and expense limitation arrangements) of the Fund were within the range of total expenses of the Comparable Funds
Semiannual Report | 79
Franklin Alternative Strategies Funds
Shareholder Information (continued)
Franklin K2 Alternative Strategies Fund
Board Review of Investment Management Agreement and Sub-Advisory Agreements
(continued)
(both including and excluding their proposed fee waiver and expense limitation arrangements). Lastly, the Board noted that the expected investment management fee and total expenses of the Fund (including, in each case, the proposed fee waiver and expense limitation arrangements) were relatively higher than the investment management fees and total expenses of the funds in the Lipper Data (including, in each case, the proposed fee waiver and expense limitation arrangements). It was noted that while the expected investment management fee and total expenses of the Fund (including, in each case, the proposed fee waiver and expense limitation arrangements) were relatively higher than those in the Lipper Data, the Lipper Data presented a limited comparison because, as discussed above, of the limited number of funds available for the Lipper Data due to the nature of the Fund.
Based upon its consideration of all these factors, the Board determined that the investment management and sub-advisory fee structure was fair and reasonable.
ECONOMIES OF SCALE. The Board considered economies of scale that may be realized by K2 Advisors, its affiliates and each Sub-Advisor as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management and sub-advisory fees charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. Because the Fund had not yet commenced operations, the Board concluded that economies of scale were difficult to consider at this time.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’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 Fund’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 Fund 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.
80 | Semiannual Report
![](https://capedge.com/proxy/N-CSRS/0001535538-14-000010/k2068_s0114x81x1.jpg)
Franklin Alternative Strategies Funds
Consolidated Financial Highlights
Franklin Pelagos Commodities Strategy Fund | |||||||||
Six Months Ended | |||||||||
November 30, 2013 | Year Ended May 31, | ||||||||
(unaudited) | 2013 | 2012 | a | ||||||
Per share operating performance | |||||||||
(for a share outstanding throughout the period) | |||||||||
Net asset value, beginning of period | $ | 9.43 | $ | 9.15 | $ | 10.00 | |||
Income from investment operationsb: | |||||||||
Net investment income (loss)c | (0.03 | ) | (0.08 | ) | (0.05 | ) | |||
Net realized and unrealized gains (losses) | (0.45 | ) | 0.36 | (0.80 | ) | ||||
Total from investment operations | (0.48 | ) | 0.28 | (0.85 | ) | ||||
Less distributions from net investment income | — | (—)d | — | ||||||
Net asset value, end of period | $ | 8.95 | $ | 9.43 | $ | 9.15 | |||
Total returne | (5.09 | )% | 3.06 | % | (8.50 | )% | |||
Ratios to average net assetsf | |||||||||
Expenses before waiver and payments by affiliates | 1.11 | % | 1.14 | % | 5.08 | % | |||
Expenses net of waiver and payments by affiliates | 1.10 | % | 1.10 | % | 1.10 | % | |||
Net investment income (loss) | (0.73 | )% | (0.76 | )% | (1.07 | )% | |||
Supplemental data | |||||||||
Net assets, end of period (000's) | $ | 99,796 | $ | 107,853 | $ | 14,374 | |||
Portfolio turnover rate | —%g | 21.47 | % | —%g |
a For the period December 7, 2011 (commencement of operations) to May 31, 2012.
b The amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statements of Operations for the period due
to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
c Based on average daily shares outstanding.
d Amount rounds to less than $0.01 per share.
e Total return is not annualized for periods less than one year.
f Ratios are annualized for periods less than one year.
g For the period there were no purchases or sales of investments (other than short term securities).
Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. |1
Franklin Alternative Strategies Funds
Consolidated Statement of Investments, November 30, 2013 (unaudited)
Franklin Pelagos Commodities Strategy Fund | Principal Amount | Value | ||
U.S. Government and Agency Securities 37.0% | ||||
FFCB, 0.68%, 9/26/16 | $ | 18,000,000 | $ | 18,000,018 |
FNMA, 1.07%, 9/27/17 | 19,000,000 | 18,956,869 | ||
Total U.S. Government and Agency Securities (Cost $36,996,034) | 36,956,887 | |||
Short Term Investments 62.2% | ||||
U.S. Government and Agency Securities 61.6% | ||||
a,b FHLB, 12/02/13 | 1,000,000 | 1,000,000 | ||
a,b U.S. Treasury Bills, | ||||
x,x 4/03/14 | 16,000,000 | 15,995,728 | ||
x,c 7/24/14 | 42,500,000 | 42,476,540 | ||
x,x 10/16/14 | 2,000,000 | 1,998,410 | ||
Total U.S. Government and Agency Securities (Cost $61,459,065) | 61,470,678 | |||
Shares | ||||
Money Market Funds (Cost $580,262) 0.6% | ||||
d,e Institutional Fiduciary Trust Money Market Portfolio | 580,262 | 580,262 | ||
Total Investments (Cost $99,035,361) 99.2% | 99,007,827 | |||
f Other Assets, less Liabilities 0.8% | 788,310 | |||
Net Assets 100.0% | $ | 99,796,137 |
At November 30, 2013, the Fund had the following futures contracts outstanding. See Note 1(c).
Futures Contracts b | ||||||||||
Number of | Notional | Expiration | Unrealized | Unrealized | ||||||
Description | Type | Contracts | Value | Date | Appreciation Depreciation | |||||
Comm odity Contracts | ||||||||||
Brent Crude Oil | Long | 009 | $ | 981,180 | 2/13/14 | $ | - | $ | (4,523 | ) |
Natural Gas | Long | 230 | 9,094,200 | 12/27/13 | 452,535 | - | ||||
Wheat | Long | 074 | 2,474,375 | 3/14/14 | 34,679 | - | ||||
WTI Crude Oil | Long | 022 | 2,051,280 | 2/20/14 | - | (45,939 | ) | |||
WTI Crude Oil | Long | 057 | 5,317,530 | 4/22/14 | - | (236,889 | ) | |||
Total | $ | 19,918,565 | 487,214 | (287,351 | ) | |||||
Net unrealized appreciation (depreciation) | $ | 199,863 |
At November 30, 2013, the Fund had the following commodity-linked total return swap contracts outstanding. See Note 1(c).
Commodity-Linked Total Return Swap Contracts b | ||||||||||
Notional | Expiration | Unrealized | Unrealized | |||||||
Counterparty | Fund Receives | Fund Pays | Value | Date Appreciation Depreciation | ||||||
MSCS | Return of the Dow | Jones-UBS Commodity ex-Precious Metals Index 3 Month Forw ard | 0.28 | % | $ | 42,088,907 | 12/19/13 | $ | 88,907 | $ - |
MSCS | Return of the Dow | Jones-UBS Commodity ex-Natural Gas, WTI Crude Oil and Corn Index | 0.18 | % | 36,835,048 | 12/12/13 | 35,048 | - | ||
Total | $ | 78,923,955 | 123,955 | - | ||||||
Net unrealized appreciation (depreciation) | $ | 123,955 |
2 | Semiannual Report
Franklin Alternative Strategies Funds
Consolidated Statement of Investments, November 30, 2013 (unaudited) (continued)
a The security is traded on a discount basis with no stated coupon rate.
b A portion or all of the security is owned by FPC Holdings Corp., a wholly-owned subsidiary of the Fund. See Note 1(d).
c Security or a portion of the security has been pledged as collateral for open futures contracts. At November 30, 2013, the value of this security and/or cash pledged as collateral
was $1,664,026, representing 1.67% of net assets.
d Non-income producing.
e See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
f Includes unrealized appreciation/depreciation on open futures and swap contracts, as well as other assets and liabilities.
See Abbreviations on page 20.
Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. |3
Franklin Alternative Strategies Funds
Consolidated Financial Highlights
Franklin Pelagos Managed Futures Strategy Fund | |||||||||
Six Months Ended | |||||||||
November 30, 2013 | Year Ended May 31, | ||||||||
(unaudited) | 2013 | 2012 | a | ||||||
Per share operating performance | |||||||||
(for a share outstanding throughout the period) | |||||||||
Net asset value, beginning of period | $ | 8.20 | $ | 9.91 | $ | 10.00 | |||
Income from investment operationsb: | |||||||||
Net investment income (loss)c | (0.03 | ) | (0.07 | ) | (0.05 | ) | |||
Net realized and unrealized gains (losses) | (0.19 | ) | (1.63 | ) | (0.04 | ) | |||
Total from investment operations | (0.22 | ) | (1.70 | ) | (0.09 | ) | |||
Less distributions from net investment income | — | (0.01 | ) | — | |||||
Net asset value, end of period | $ | 7.98 | $ | 8.20 | $ | 9.91 | |||
Total returnd | (2.68 | )% | (17.14 | )% | (0.90 | )% | |||
Ratios to average net assetse | |||||||||
Expenses before waiver and payments by affiliates | 1.79 | % | 1.94 | % | 5.18 | % | |||
Expenses net of waiver and payments by affiliates | 1.10 | % | 1.10 | % | 1.10 | % | |||
Net investment income (loss) | (0.74 | )% | (0.77 | )% | (1.08 | )% | |||
Supplemental data | |||||||||
Net assets, end of period (000's) | $ | 11,694 | $ | 12,712 | $ | 15,239 | |||
Portfolio turnover rate | —%f | 108.46 | % | —%f |
a For the period December 7, 2011 (commencement of operations) to May 31, 2012.
b The amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statements of Operations for the period due
to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
c Based on average daily shares outstanding.
d Total return is not annualized for periods less than one year.
e Ratios are annualized for periods less than one year.
f For the period there were no purchases or sales of investments (other than short term securities).
Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. |4
Franklin Alternative Strategies Funds
Consolidated Statement of Investments, November 30, 2013 (unaudited)
Franklin Pelagos Managed Futures Strategy Fund | Principal Amount | Value | |||
U.S. Government and Agency Securities (Cost $4,994,348) 42.5% | |||||
FFCB, 0.70%, 4/11/17 | $ | 5,000,000 | $ | 4,972,625 | |
Short Term Investments 56.7% | |||||
U.S. Government and Agency Securities 51.3% | |||||
a,b FHLB, 12/02/13 | 100,000 | 100,000 | |||
a,b U.S. Treasury Bills, | |||||
x,c 3/06/14 | 1,500,000 | 1,499,702 | |||
x,x 4/03/14 | 4,400,000 | 4,398,825 | |||
Total U.S. Government and Agency Securities (Cost $5,997,614) | 5,998,527 | ||||
Shares | |||||
Money Market Funds (Cost $634,409) 5.4% | |||||
d,e Institutional Fiduciary Trust Money Market Portfolio | 634,409 | 634,409 | |||
Total Investments (Cost $11,626,371) 99.2% | 11,605,561 | ||||
Options Written (0.1)% | (13,080 | ) | |||
f Other Assets, less Liabilities 0.9% | 101,957 | ||||
Net Assets 100.0% | $ | 11,694,438 | |||
Number of Contracts | |||||
b,g Options Written (0.1)% | |||||
x,x Puts - Exchange-Traded | |||||
x,x Corn Future, December Strike Price $4.10, Expires 12/27/13 | 8 | $ | (1,400 | ) | |
x,x Natural Gas Future, December Strike Price $3.55, Expires 12/26/13 | 13 | (2,080 | ) | ||
x,x Silver Future, December Strike Price $19, Expires 12/26/13 | 5 | (5,300 | ) | ||
x,x Wheat Future, December Strike Price $6.35, Expires 12/27/13 | 15 | (1,500 | ) | ||
x,x WTI Crude Oil Future, December Strike Price $90, Expires 12/16/13 | 5 | (2,800 | ) | ||
Total Options Written (Premiums Received $18,774) | $ | (13,080 | ) |
At November 30, 2013, the Fund had the following futures contracts outstanding. See Note 1(c).
Futures Contracts b | ||||||||||
Number of | Notional Expiration Unrealized | Unrealized | ||||||||
Description | Type Contracts | Value | Date | Appreciation Depreciation | ||||||
Com modity Contracts | ||||||||||
Soy bean | Short | 04 | $ | 267,300 | 1/14/14 | $ | - | $ | (12,464 | ) |
Currency Contracts | ||||||||||
AUD/USD | Short | 10 | 909,200 | 12/16/13 | 1,070 | - | ||||
EUR/USD | Short | 05 | 849,188 | 12/16/13 | - | (19,015 | ) | |||
USD/GBP | Long | 09 | 920,250 | 12/16/13 | 11,673 | - | ||||
JPY/USD | Short | 07 | 854,088 | 12/16/13 | 40,229 | - | ||||
3,532,726 | 52,972 | (19,015 | ) | |||||||
Equity Contracts | ||||||||||
Euro STOXX 50 Index | Long | 22 | 921,946 | 12/20/13 | 11,282 | - | ||||
MSCI Emerging Markets Mini Index | Short | 18 | 912,510 | 12/20/13 | - | (9,324 | ) | |||
Russell 2000 Mini Index | Long | 08 | 913,360 | 12/20/13 | 29,016 | - | ||||
S&P 500 E-Mini Index | Long | 10 | 902,050 | 12/20/13 | 8,645 | - | ||||
S&P MidCap 400 E-Mini Index | Long | 07 | 912,170 | 12/20/13 | - | (2,603 | ) | |||
SPI 200 Index | Short | 07 | 849,576 | 12/19/13 | - | (657 | ) | |||
5,411,612 | 48,943 | (12,584 | ) | |||||||
Total | $ | 9,211,638 | 101,915 | (44,063 | ) | |||||
Net unrealized appreciation (depreciation) | $ | 57,852 |
5 | Semiannual Report
Franklin Alternative Strategies Funds
Consolidated Statement of Investments, November 30, 2013 (unaudited) (continued)
aThe security is traded on a discount basis with no stated coupon rate.
bA portion or all of the security is owned by FPMF Holdings Corp., a wholly-owned subsidiary of the Fund. See Note 1(d).
cSecurity or a portion of the security has been pledged as collateral for open futures contracts. At November 30, 2013, the value of this security and/or cash pledged as collateral
was $559,883, representing 4.79% of net assets.
dNon-income producing.
eSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
fIncludes unrealized appreciation/depreciation on open futures contracts as well as other assets and liabilities.
gSee Note 1(c) regarding written options.
See Abbreviations on page 20.
Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. |6
Franklin Alternative Strategies Funds
Consolidated Financial Statements
Consolidated Statements of Assets and Liabilities
November 30, 2013 (unaudited)
Franklin Pelagos | Franklin Pelagos | |||||
Commodities | Managed Futures | |||||
Strategy Fund | Strategy Fund | |||||
Assets: | ||||||
Investments in securities: | ||||||
Cost - Unaffiliated issuers | $ | 98,455,099 | $ | 10,991,962 | ||
Cost - Sweep Money Fund (Note 7) | 580,262 | 634,409 | ||||
Total cost of investments | $ | 99,035,361 | $ | 11,626,371 | ||
Value - Unaffiliated issuers | $ | 98,427,565 | $ | 10,971,152 | ||
Value - Sweep Money Fund (Note 7) | 580,262 | 634,409 | ||||
Total value of investments | 99,007,827 | 11,605,561 | ||||
Cash | 859,730 | 115,465 | ||||
Receivables: | ||||||
Interest | 57,338 | 12,418 | ||||
Affiliates | – | 3,041 | ||||
Variation margin | 174,999 | – | ||||
Unrealized appreciation on swap contracts | 123,955 | – | ||||
Other assets | 5 | 2 | ||||
Total assets | 100,223,854 | 11,736,487 | ||||
Liabilities: | ||||||
Payables: | ||||||
Investment securities purchased | 350,758 | – | ||||
Management fees | 65,389 | – | ||||
Trustees' fees and expenses | 119 | 108 | ||||
Professional fees | 6,996 | 22,929 | ||||
Variation margin | – | 1,271 | ||||
Options written, at value (premiums received $18,774) | – | 13,080 | ||||
Accrued expenses and other liabilities | 4,455 | 4,661 | ||||
Total liabilities | 427,717 | 42,049 | ||||
Net assets, at value | $ | 99,796,137 | $ | 11,694,438 | ||
Net assets consist of: | ||||||
Paid-in capital | $ | 106,886,145 | $ | 14,671,463 | ||
Accumulated net investment loss | (749,130 | ) | (340,937 | ) | ||
Net unrealized appreciation (depreciation) | 296,284 | 50,390 | ||||
Accumulated net realized gain (loss) | (6,637,162 | ) | (2,686,478 | ) | ||
Net assets, at value | $ | 99,796,137 | $ | 11,694,438 | ||
Shares outstanding | 11,152,736 | 1,465,986 | ||||
Net asset value and maximum offering price per share | $ | 8.95 | $ | 7.98 |
Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. |7
Franklin Alternative Strategies Funds
Consolidated Financial Statements (continued)
Consolidated Statements of Operations
for the six months ended November 30, 2013 (unaudited)
Franklin Pelagos | Franklin Pelagos | |||||
Commodities | Managed Futures | |||||
Strategy Fund | Strategy Fund | |||||
Investment income: | ||||||
Interest | $ | 189,217 | $ | 21,436 | ||
Expenses: | ||||||
Management fees (Note 3a) | 382,242 | 44,111 | ||||
Administrative fees (Note 3b) | 52,807 | 5,985 | ||||
Custodian fees (Note 4) | 324 | 56 | ||||
Reports to shareholders | 2,109 | 2,103 | ||||
Professional fees | 56,832 | 43,981 | ||||
Trustees' fees and expenses | 75,365 | 8,863 | ||||
Other | 830 | 537 | ||||
Total expenses | 570,509 | 105,636 | ||||
Expenses waived/paid by affiliates (Note 3d) | (6,057 | ) | (40,664 | ) | ||
Net expenses | 564,452 | 64,972 | ||||
Net investment income (loss) | (375,235 | ) | (43,536 | ) | ||
Realized and unrealized gains (losses): | ||||||
Net realized gain (loss) from: | ||||||
Investments | 2,343 | (39,918 | ) | |||
Written options | 57,854 | 11,023 | ||||
Foreign currency transactions | – | 193 | ||||
Futures contracts | (1,501,421 | ) | (423,025 | ) | ||
Swap contracts | (5,194,861 | ) | – | |||
Net realized gain (loss) | (6,636,085 | ) | (451,727 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||||
Investments | 34,953 | 49,299 | ||||
Translation of other assets and liabilities denominated in foreign currencies | – | 5,081 | ||||
Futures contracts | 259,242 | 111,754 | ||||
Swap contracts | 1,267,956 | – | ||||
Net change in unrealized appreciation (depreciation) | 1,562,151 | 166,134 | ||||
Net realized and unrealized gain (loss) | (5,073,934 | ) | (285,593 | ) | ||
Net increase (decrease) in net assets resulting from operations | $ | (5,449,169 | ) | $ | (329,129 | ) |
Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. |8
Franklin Alternative Strategies Funds
Consolidated Financial Statements (continued)
Consolidated Statements of Changes in Net Assets
Increase (decrease) in net assets: Operations: Net investment income (loss)
Net realized gain (loss) from investments, written _options, foreign currency transactions, futures and swap contracts. Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies, futures and swap contracts. Net increase (decrease) in net assets resulting from operations
Franklin Pelagos Commodities | Franklin Pelagos Managed Futures | ||||||||||
Strategy Fund | Strategy Fund | ||||||||||
Six Months Ended | Six Months Ended | ||||||||||
November 30, 2013 | Year Ended | November 30, 2013 | Year Ended | ||||||||
(unaudited) | May 31, 2013 | (unaudited) | May 31, 2013 | ||||||||
$ | (375,235 | ) | $ | (644,484 | ) | $ | (43,536 | ) | $ | (106,164 | ) |
(6,636,085 | ) | (9,213,046 | ) | (451,727 | ) | (1,592,565 | ) | ||||
1,562,151 | (1,093,090 | ) | 166,134 | (933,825 | ) | ||||||
(5,449,169 | ) | (10,950,620 | ) | (329,129 | ) | (2,632,554 | ) |
Distributions to shareholders from: | ||||||||||||
Net investment income | – | (238 | ) | – | (17,799 | ) | ||||||
Capital share transactions (Note 2) | (2,607,554 | ) | 104,429,638 | (687,945 | ) | 122,849 | ||||||
Net increase (decrease) in net assets | (8,056,723 | ) | 93,478,780 | (1,017,074 | ) | (2,527,504 | ) | |||||
Net assets: | ||||||||||||
Beginning of period | 107,852,860 | 14,374,080 | 12,711,512 | 15,239,016 | ||||||||
End of period | $ | 99,796,137 | $ | 107,852,860 | $ | 11,694,438 | $ | 12,711,512 | ||||
Accumulated net investment loss | ||||||||||||
included in net assets: | ||||||||||||
End of period | $ | (749,130 | ) | $ | (373,895 | ) | $ | (340,937 | ) | $ | (297,401 | ) |
Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. |9
Franklin Alternative Strategies Funds
Notes to Consolidated Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Alternative Strategies Funds (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of three separate funds. The Franklin Pelagos Commodities Strategy Fund and the Franklin Pelagos Managed Futures Strategy Fund (Funds) are included in this report. The shares of the Funds are issued in private placements and are exempt from registration under the Securities Act of 1933 (1933 Act).
Effective January 10, 2014, the Franklin Pelagos Commodities Strategy Fund began offering four new classes of shares: Class A, C, R and R6. The privately offered shares of the Fund were redesignated Advisor Class shares upon the public offering of the Fund. Prior to the effective date, the Fund’s shares were not registered under the 1933 Act.
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. Under procedures approved by the Trust's Board of Trustees (the Board), the Funds' administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC 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 (OTC) 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 net asset value.
Derivative financial instruments (derivatives) listed on an exchange are valued at the official closing price of the day. Certain derivatives trade in the OTC market. The Funds’ pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Funds’ net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
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 VLOC 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 VLOC 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 VLOC 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. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Funds may enter into foreign currency
10 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Consolidated Financial Statements (unaudited) (continued)
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
b. | Foreign Currency Translation (continued) |
exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Consolidated Statements of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Derivative Financial Instruments
The Funds invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the fund to gains or losses in excess of the amounts shown on the Consolidated Statements of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Consolidated Statements of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Funds attempt to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Funds include failure of the Funds to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Consolidated Statements of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Funds of any net liability owed to that counterparty under the ISDA agreement. At November 30, 2013, the Fund’s had no OTC derivatives in a net liability position for such contracts.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the fund or the
11 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Consolidated Financial Statements (unaudited) (continued)
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
c. | Derivative Financial Instruments (continued) |
counterparty within a few business days. Collateral pledged and/or received by the fund for OTC derivatives, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Funds' investment objectives.
The Funds entered into exchange traded futures contracts primarily to gain exposure to commodity price, interest rate, or equity price risk and certain foreign currencies. A futures contract is an agreement between the fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the fund, and the daily change in fair value is accounted for as a variation margin payable or receivable on the Consolidated Statements of Assets and Liabilities.
The Franklin Pelagos Commodities Strategy Fund entered into OTC commodity-linked total return swap contracts primarily to gain exposure to commodity price risk of an underlying asset or index. A commodity-linked total return swap is an agreement between the fund and a counterparty to exchange a market linked return for a floating or fixed rate payment, both based upon a notional amount. Over the term of the contract, contractually required payments to be paid or received are accrued daily and recorded as unrealized depreciation or appreciation until the payments are made, at which time they are realized. Payments received or paid to recognize changes in the value of the underlying asset or index are recorded as realized gain or loss.
The Funds purchased or wrote exchange traded option contracts primarily to manage and/or gain exposure to commodity price and equity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. Options purchased are recorded as an asset while options written are recorded as a liability. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium and the cost to close the position is recorded as a realized gain or loss.
See Notes 6 and 8 regarding investment transactions and other derivative information, respectively.
d. Investments in FPC Holdings Corp. and FPMF Holdings Corp. (FP Subsidiaries)
The Funds invest in certain financial instruments and commodity-linked derivative investments through their respective investments in the FP Subsidiaries. Both FP Subsidiaries are Cayman Islands exempted liability companies, are wholly-owned subsidiaries of their respective funds, and are able to invest in certain financial instruments and commodity-linked derivative investments consistent with the investment objective of their respective funds. At November 30, 2013, the FP Subsidiaries’ investments, as well as any other assets and liabilities of the FP Subsidiaries are reflected in the Funds’ Consolidated Statements of Investments and Consolidated Statements of Assets and Liabilities. The financial statements have been consolidated and include the accounts of the Funds and their respective FP Subsidiaries. All intercompany transactions and balances have been eliminated. At November 30, 2013, the Funds’ investments in the FP Subsidiaries were as follows:
Consolidated Net | FP Subsidiaries | % of Consolidated | |||||
Fund Name | FP Subsidiaries a | Assets | Net Assets | Net Assets | |||
Franklin Pelagos Commodities Strategy Fund | FPC Holdings Corp. | $ | 99,796,137 | $ | 22,779,920 | 22.8 | % |
Franklin Pelagos Managed Futures Strategy Fund | FPMF Holdings Corp. | 11,694,438 | 2,498,678 | 21.4 | % | ||
a The Funds’ investments in their FP Subsidiaries are limited to 25% of consolidated assets. | |||||||
e. 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.
12 | Semiannual Report
Franklin Alternative Strategies Funds
Notes to Consolidated Financial Statements (unaudited) (continued)
1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
e. | Income Taxes (continued) |
Each fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of November 30, 2013, and for all open tax years, each fund has determined that no liability for unrecognized tax benefits is required in each fund's consolidated financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
f. 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 accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
g. Accounting Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
h. 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, 2013, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
Franklin Pelagos Commodities | Franklin Pelagos Managed Futures | |||||||||
Strategy Fund | Strategy Fund | |||||||||
Shares | Amount | Shares | Amount | |||||||
Six Months ended November 30, 2013: | ||||||||||
Shares sold | 2,358,147 | $ | 21,603,436 | 289,216 | $ | 2,333,875 | ||||
Shares redeemed | (2,643,781 | ) | (24,210,990 | ) | (373,656 | ) | (3,021,820 | ) | ||
Net increase (decrease) | (285,634 | ) | $ | (2,607,554 | ) | (84,440 | ) | $ | (687,945 | ) |
Year ended May 31, 2013: | ||||||||||
Shares sold | 10,421,243 | $ | 110,235,400 | 18,241 | $ | 164,800 | ||||
Shares issued in reinvestment of distributions | 24 | 238 | 1,401 | 12,049 | ||||||
Shares redeemed | (553,968 | ) | (5,806,000 | ) | (6,323 | ) | (54,000 | ) | ||
Net increase (decrease) | 9,867,299 | $ | 104,429,638 | 13,319 | $ | 122,849 | ||||
13| Semiannual Report |
Franklin Alternative Strategies Funds
Consolidated Statement of Investments, November 30, 2013 (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
Subsidiary | Affiliation |
Pelagos Capital Management, LLC (Pelagos) | Investment manager |
Franklin Advisers, Inc. (Advisers) | Investment manager |
Franklin Templeton Services, LLC (FT Services) | Administrative manager |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
Effective September 1, 2013, Pelagos became the Fund’s investment manager and no longer provided subadvisory services to the Funds and FP Subsidiaries. Prior to that date, Advisers served as the Fund’s investment manager and Pelagos served as the Fund’s sub-adviser. The Funds and FP Subsidiaries pay an investment management fee to Pelagos of 0.85% per year of the average daily net assets of each of the Funds and FP Subsidiaries. Management fees paid by the Funds are reduced on assets invested in their respective FP Subsidiaries, in an amount not to exceed the management fees paid by the FP Subsidiaries.
Effective September 1, 2013, the Funds and FP Subsidiaries combined their investment management and administration agreements as approved by the Board. The fees paid under the combined agreement do not exceed the aggregate fees that were paid under the separate agreements.
Prior to September 1, 2013, the Funds and FP Subsidiaries paid investment management fees to Advisers of 0.65% per year of the average daily net assets of each of the Funds and FP Subsidiaries. Management fees paid by the Funds were reduced on assets invested in their respective FP Subsidiaries, in an amount not to exceed the management fees paid by the FP Subsidiaries.
Effective June 13, 2013, Franklin Templeton Institutional LLC, an indirect subsidiary of Franklin Resources, Inc., acquired 100% ownership position of Pelagos.
b. Administrative Fees
Effective September 1, 2013, under an agreement with Pelagos, FT Services provides administrative services to the Funds and FP Subsidiaries. The fee is paid by Pelagos based on each of the Funds and FP Subsidiaries average daily net assets, and is not an additional expense of the Funds or FP Subsidiaries.
Prior to September 1, 2013, the Funds and FP Subsidiaries paid administrative fees to FT Services of 0.20% per year of the average daily net assets of each of the Funds and FP Subsidiaries. Administrative fees paid by the Fund and FP Subsidiaries were reduced on assets invested in their respective FP Subsidiaries, in an amount not to exceed the administrative fees paid by the FP Subsidiaries.
c. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Funds and is not paid by the Funds for the services.
d. Waiver and Expense Reimbursements
Pelagos 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 Franklin Pelagos Commodities Strategy Fund and the Franklin Pelagos Managed Futures Strategy Fund so that the expenses (excluding acquired fund fees and expenses) of the Funds do not exceed 1.10% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until December 31, 2014 and December 31, 2015, respectively. Prior to the combining of the investment management and
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Franklin Alternative Strategies Funds
Notes to Consolidated Financial Statements (unaudited) (continued)
3. | TRANSACTIONS WITH AFFILIATES (continued) |
d. | Waiver and Expense Reimbursements (continued) |
administrative agreements, the funds had a contractual fee agreement with FT Services, which was eliminated effective September 1, 2013.
e. Other Affiliated Transactions | ||||||
At November 30, 2013, the shares of the Funds were owned by the following entities: | ||||||
Franklin Pelagos Commodities | Franklin Pelagos Managed Futures | |||||
Strategy Fund | Strategy Fund | |||||
% of Consolidated | % of Consolidated | |||||
Shares | Outstanding Shares | Shares | Outstanding Shares | |||
Advisers | - | - | 345,869 | 23.59 | % | |
Franklin Templeton Moderate Allocation Fund | 5,209,062 | 46.71 | % | 511,630 | 34.90 | % |
Franklin Templeton Conservative Allocation Fund | 4,186,808 | 37.54 | % | 413,012 | 28.17 | % |
Franklin Templeton Grow th Allocation Fund | 1,170,588 | 10.50 | % | 109,997 | 7.50 | % |
Franklin Templeton Multi-Asset Real Return Fund | 217,906 | 1.95 | % | 49,872 | 3.40 | % |
Franklin LifeSmart 2015 Retirement Target Fund | 168,643 | 1.51 | % | 16,543 | 1.13 | % |
Franklin LifeSmart 2025 Retirement Target Fund | 106,063 | 0.95 | % | 10,326 | 0.71 | % |
Franklin LifeSmart 2035 Retirement Target Fund | 57,285 | 0.51 | % | 5,339 | 0.37 | % |
Franklin LifeSmart 2045 Retirement Target Fund | 31,726 | 0.28 | % | 2,959 | 0.20 | % |
Franklin LifeSmart 2020 Retirement Target Fund | 2,903 | 0.03 | % | 271 | 0.02 | % |
Franklin LifeSmart 2030 Retirement Target Fund | 1,045 | 0.01 | % | 101 | 0.01 | % |
Franklin LifeSmart 2040 Retirement Target Fund | 371 | 0.00 | % | 35 | 0.00 | % |
Franklin LifeSmart 2050 Retirement Target Fund | 336 | 0.00 | % | 32 | 0.00 | % |
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, 2013, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At May 31, 2013, the capital loss carryforwards were as follows:
Franklin Pelagos | Franklin Pelagos | |||
Commodities | Managed Futures | |||
Strategy Fund | Strategy Fund | |||
Capital loss carryforw ards: | ||||
Short term | $ | 1,077 | $ | 1,678,029 |
Long term | - | 578,336 | ||
Total capital loss carryforw ards | $ | 1,077 | $ | 2,256,365 |
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Franklin Alternative Strategies Funds
Notes to Consolidated Financial Statements (unaudited) (continued)
5. INCOME TAXES (continued)
At November 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Franklin Pelagos | Franklin Pelagos | |||||
Commodities | Managed Futures | |||||
Strategy Fund | Strategy Fund | |||||
Cost of investments | $ | 99,081,204 | $ | 11,624,523 | ||
Unrealized appreciation | $ | 17,257 | $ | 913 | ||
Unrealized depreciation | (90,634 | ) | (19,875 | ) | ||
Net unrealized appreciation (depreciation) | $ | (73,377 | ) | $ | (18,962 | ) |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
There were no purchases or sales of investments (other than short term securities) for the period ended November 30, 2013.
Transactions in options written during the period ended November 30, 2013, were as follows:
Franklin Pelagos | Franklin Pelagos | |||||||||
Commodities | Managed Futures | |||||||||
Strategy Fund | Strategy Fund | |||||||||
Number of Premiums Number of Premiums | ||||||||||
Contracts | Received | Contracts | Received | |||||||
Options outstanding at May 31, 2013 | - | $ | - | - | $ | - | ||||
Options w ritten | 203 | 72,333 | 69 | 29,797 | ||||||
Options expired | (192 | ) | (57,854 | ) | (23 | ) | (11,023 | ) | ||
Options exercised | (11 | ) | (14,479 | ) | - | - | ||||
Options closed | - | - | - | - | ||||||
Options outstanding at November 30, 2013 | - | $ | - | 46 | $ | 18,774 |
See Notes 1(c) and 8 regarding derivative financial instruments and other derivative information, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
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Franklin Alternative Strategies Funds
Notes to Consolidated Financial Statements (unaudited) (continued)
8. OTHER DERIVATIVE INFORMATION
At November 30, 2013, the Funds' investments in derivative contracts are reflected on the Consolidated Statements of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | |||||
Derivative Contracts Not | Consolidated Statements | |||||
Accounted for as | Consolidated Statements of | Fair Value | of Assets and Liabilities | Fair Value | ||
Hedging Instruments | Assets and Liabilities Location | Amounta | Location | Amounta | ||
Franklin Pelagos Commodities Strategy Fund | ||||||
Commodity contracts | Unrealized appreciation on sw ap | $ | 611,169 | Net assets consist of - net | $ | 287,351 |
contracts / Net assets consist of - net | unrealized appreciation | |||||
unrealized appreciation (depreciation) | (depreciation) | |||||
Franklin Pelagos Managed Futures Strategy Fund | ||||||
Commodity contracts | Options w ritten, at value / | 25,544 | ||||
Net assets consist of - net | ||||||
unrealized appreciation | ||||||
(depreciation) | ||||||
Equity contracts | Net assets consist of - net unrealized | 48,943 | Net assets consist of - net | 12,584 | ||
appreciation (depreciation) | unrealized appreciation | |||||
(depreciation) | ||||||
Foreign exchange contracts | Net assets consist of - net unrealized | 52,972 | Net assets consist of - net | 19,015 | ||
appreciation (depreciation) | unrealized appreciation | |||||
(depreciation) |
aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Consolidated Statements of Investments. Only current day's variation margin is separately reported within the Consolidated Statements of Assets and Liabilities.
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Franklin Alternative Strategies Funds
Notes to Consolidated Financial Statements (unaudited) (continued)
8. OTHER DERIVATIVE INFORMATION (continued)
For the period ended November 30, 2013, the effect of derivative contracts on the Funds’ Consolidated Statements of Operations was as follows:
Change in Unrealized | |||||||
Derivative Contracts Not | Realized Gain | Appreciation | |||||
Accounted for as | Consolidated Statements of | (Loss) for the | (Depreciation) for the | ||||
Hedging Instruments | Operations Locations | Period | Period | ||||
Franklin Pelagos Commodities Strategy Fund | |||||||
Commodity contracts | Net realized gain (loss) from w ritten | $ | (6,638,428 | ) | $ | 1,527,198 | |
options, futures and sw ap contracts / | |||||||
Net change in unrealized appreciation | |||||||
(depreciation) on futures and sw ap | |||||||
contracts | |||||||
Franklin Pelagos Managed Futures Strategy Fund | |||||||
Commodity contracts | Net realized gain (loss) from | (1,312 | ) | 72,810 | |||
investments, w ritten options and | |||||||
futures contracts / Net change in | |||||||
unrealized appreciation (depreciation) | |||||||
on investments and futures contracts | |||||||
Equity contracts | Net realized gain (loss) from | (247,936 | ) | (6,818 | ) | ||
investments and futures contracts / | |||||||
Net change in unrealized appreciation | |||||||
(depreciation) on investments and | |||||||
futures contracts | |||||||
Foreign exchange contracts | Net realized gain (loss) from futures | (179,575 | ) | 82,660 | |||
contracts / Net change in unrealized | |||||||
appreciation (depreciation) on futures | |||||||
contracts | |||||||
Interest rate contracts | Net realized gain (loss) from futures | (23,184 | ) | (2,980 | ) | ||
contracts / Net change in unrealized | |||||||
appreciation (depreciation) on futures | |||||||
contracts |
For the period ended November 30, 2013, the average month end fair value of derivatives represented 7.00% and 3.33%, respectively, of average month end net assets. The average month end number of open derivative contracts for the period was 9 and 17, respectively.
See Notes 1(c) and 6 regarding derivative financial instruments and investment transactions, respectively.
9. CREDIT FACILITY
The Funds, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Consolidated Statements of Operations. During the period ended November 30, 2013, the Funds did not use the Global Credit Facility.
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Franklin Alternative Strategies Funds
Notes to Consolidated Financial Statements (unaudited) (continued)
10. FAIR VALUE MEASUREMENTS
The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the 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, 2013, in valuing the Funds’ assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | ||||||
Franklin Pelagos Commodities Strategy Fund | |||||||||
Assets: | |||||||||
Investments in Securities: | |||||||||
U.S. Government and Agency Securities | $ | - | $ | 36,956,887 | $ | - | $ | 36,956,887 | |
Short Term Investments | 61,050,940 | 1,000,000 | - | 62,050,940 | |||||
Total Investments in Securities | $ | 61,050,940 | $ | 37,956,887 | $ | - | $ | 99,007,827 | |
Futures Contracts | $ | 487,214 | $ | - | $ | - | $ | 487,214 | |
Sw ap Contracts | - | 123,955 | - | 123,955 | |||||
Liabilities: | |||||||||
Futures Contracts | 287,351 | - | - | 287,351 | |||||
Franklin Pelagos Managed Futures Strategy Fund | |||||||||
Assets: | |||||||||
Investments in Securities: | |||||||||
U.S. Government and Agency Securities | $ | - | $ | 4,972,625 | $ | - | $ | 4,972,625 | |
Short Term Investments | 6,532,936 | 100,000 | - | 6,632,936 | |||||
Total Investments in Securities | $ | 6,532,936 | $ | 5,072,625 | $ | - | $ | 11,605,561 | |
Futures Contracts | $ | 101,915 | $ | - | $ | - | $ | 101,915 | |
Liabilities: | |||||||||
Options Written | 13,080 | - | - | 13,080 | |||||
Futures Contracts | 44,063 | - | - | 44,063 |
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 investments at the end of the period.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Funds are currently reviewing the requirements and believe the adoption of this ASU will not have a material impact on their consolidated financial statements.
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Notes to Consolidated Financial Statements (unaudited) (continued)
12. SUBSEQUENT EVENTS
The Funds have evaluated subsequent events through the issuance of the consolidated financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the consolidated financial statements.
ABBREVIATIONS | |||||
Counterparty | Currency | Selected Portfolio | |||
MSCS - Morgan Stanley Capital Services, LLC | AUD | - Australian Dollar | FFCB | - | Federal Farm Credit Bank |
EUR | - Euro | FHLB | - | Federal Home Loan Bank | |
GBP | - British Pound | FNMA | - | Federal National Mortgage | |
JPY | - Japanese Yen | ||||
USD | - United States Dollar |
20| Semiannual Report
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 Ann Torre Bates and she 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 Robert G. Kubilis, 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 Robert G. Kubilis, 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 ALTERATIVE STRATEGIES FUNDS
By /s/LAURA F. FERGERSON
Laura F. Fergerson
Chief Executive Officer –
Finance and Administration
Date January 27, 2014
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 27, 2014
By /s/ROBERT G. KUBILIS
Robert G. Kubilis
Chief Financial Officer and
Chief Accounting Officer
Date January 27, 2014